The earnings outlook for British banks like Lloyds Banking Group (LSE: LLOY) is becoming increasingly bleak. Growth has flatlined as the pandemic drags on and inflation surges. The threat posed by Covid-19 variants means things could get much worse before they get better too.

Official statistics on Friday showed the UK economy grew just 0.1% in October. This was down significantly from 0.6% in September. The most worrying aspect is that these figures fail to reflect the impact of the recently-discovered Omicron mutation. Indeed, the introduction of Plan B restrictions by the government poses a significant threat to the recent recovery.

Maike Currie, investment director at Fidelity International, said that “the steam has well and truly been taken out of the UK economic recovery.” He noted that “supply chain issues, worker shortages and surging inflation [have] put the dampeners on growth.”

Currie added that “the path ahead is becoming increasing difficult to navigate” as uncertainty lurks.

Is Lloyds in trouble?

The worry for Lloyds isn’t just that revenues could sink and bad loans rise as the economy struggles. It’s that much-awaited Bank of England (BoE) rate hikes could be kicked into the long grass as policymakers seek to support business. Low interest rates reduce the profits that the likes of Lloyds can make from their lending activities.

BoE policymaker Michael Saunders said last week that “there could be particular advantages in waiting to see more evidence on [Omicron’s] possible effects on public health outcomes and hence on the economy.” The BoE had been tipped to raise its benchmark from record lows of 0.1% as soon as next week.

This is particularly problematic for Lloyds as it has no foreign exposure to help counter problems at home. Its considerable exposure to the rock-solid housing market provides some reasons for optimism. So do the steps it’s taking to cut costs and attract customers by investing in digital banking. But, for me, these qualities don’t compensate for the colossal dangers facing Lloyds.

2 FTSE 100 shares I’d rather buy

So while Lloyds’ share price looks mighty cheap — at 46.8p, it trades on a P/E ratio of 7.4 times for 2022 — I believe that its low valuation reflects the prospect of weak profits growth in the near term and beyond.

Besides, there are plenty of what I consider stronger FTSE 100 shares for me to choose from today. While HSBC for instance suffers the same problem of prolonged low interest rates, I think its huge exposure to fast-growing Asian economies could generate excellent shareholder returns. This bank also trades on a low P/E ratio for next year, at 9.1 times.

I’d also rather buy gold miner Polymetal International, a UK share whose profits I think will rise as inflationary pressures boost precious metals prices. This FTSE 100 share trade on a P/E ratio of 7.1 times for 2022, a price that more than reflects the unpredictable nature of metals production. Oh, and one final thing, it’s 9.1% dividend yield for next year beats Lloyds’ 5.5% reading by a huge distance.

The post Why I’d ignore Lloyds and buy these cheap FTSE 100 shares instead! appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.