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I’ve held Lloyds Banking Group (LSE:LLOY) shares since I started investing, and they’ve given me plenty to be happy about this year. The bank delivered a strong first-half performance, increased its dividend and announced another large share buyback.
Through thick and thin, it has maintained its reputation as a solid, reliable British bank. As such, it’s always been popular with investors seeking both income and capital growth.
Yet despite this, there’s a few reasons why I’m hesitant to increase my position at the moment.
It’s not because there’s any specific structural risk related to the bank. Rather, I fear its success is too closely tied to one economy, one housing market and one interest-rate cycle: the UK.
That concentration deserves careful thought. But first, let’s see why Lloyds still plays an important role in my portfolio.
Why Lloyds remains attractive
In my opinion, the long-term investment case for Lloyds hasn’t changed in years, and recent results support that.
Let’s just look at the last six months to 30 June 2026:
- Statutory profit before tax (PBT): £4.29bn (up 23%).
- Net income: £9.7bn (up 9% year on year).
- Return on tangible equity (RoTE): 17.1%.
- Customer lending: increased £10.4bn to £491.5bn (up 2%).
- Deposits: up £4.4bn to £500.9bn.
The shareholder returns are attractive too. Lloyds has lifted its interim dividend by 30% to 1.58p a share and announced a further £1bn in buybacks. Management’s new Accelerate 2030 plan targets RoTE above 18% by 2028 and around 20% by 2030.
Those are ambitious goals, and they could support stronger dividends and earnings per share if the bank delivers.
But unfortunately, targets alone aren’t guarantees. What matters far more to me is the question of whether Lloyds can still hit them if the wider economy hits a rough patch.
The risks I can’t ignore
Lloyds is predominantly focused on the UK, which makes it relatively straightforward for investors to analyse. But it also creates concentration risk. Heavily exposed to mortgages, house prices and household finances, its fortunes hinge on the nation’s economic health.
With unemployment at 4.9% and interest rates held at 3.75%, there’s an increased chance of borrowers struggling with repayments. That could increase credit losses.
Interest rates add further fuel to a (potential) fire.
In H12026, Lloyds’ banking net interest margin rose from 3.04% to 3.19%. Why? Better returns on its interest-rate hedges, more customers borrowing money, and an increase in average interest-generating assets.
But the same results noted some asset-margin compression. That matters because lower rates, mortgage refinancing and competition for deposits can pressure the difference between what a bank earns on lending and pays on deposits.
So while the 3.19% margin is encouraging, further expansion could be difficult to achieve.
A balanced approach
For me, this doesn’t make Lloyds a Sell. The dividend is rising, the buyback is meaningful and the long-term efficiency targets are encouraging.
But if I were looking for shares to buy today, I’d consider something with broader regional exposure. In the banking sector specifically, I’d look at something that offers different geographic or business characteristics.
That’s why diversification matters, even when the investment case looks convincing.
Don’t get me wrong: the bank is still worth considering as a long-term holding. But right now, a growth stock with greater global reach could deliver better short-term benefits – and I think we’ve found one…
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Mark Hartley owns shares in Lloyds Banking Group.
This story originally appeared on Motley Fool
