On 2 February, shares in Lloyds Banking Group (LSE:LLOY) were at their highest levels in over a decade. Six weeks later, it’s a different story. 

The stock is down 15%, meaning a £1,000 investment from six weeks ago is now worth £846. The question for investors now is whether there’s more to come.

Artificial intelligence

Lloyds isn’t the first name that comes to mind when thinking about artificial intelligence (AI). The firm’s big advantage is the size of its consumer deposit base, which is the largest in the UK. 

That gives Lloyds a big advantage when it comes to writing loans. Savings accounts don’t attract much interest, so the bank can keep more of the loan interest it generates.

I don’t think AI is likely to undermine that advantage. While it might bring about some changes to how loans get written, I expect Lloyds to still have a cost advantage going forward.

The bigger concern is the impact of AI on the wider economy. If AI agents lead to higher unemployment, mortgage defaults could follow – and that’s the main risk right now.

AI apocalypse

The stock market’s worry at the moment is that workers in the knowledge economy could be replaced by AI agents. In that situation, job losses are likely to follow. 

That could lead to lower spending, but this means consumer products companies might have to cut jobs to protect their margins. And that leads to even less spending and the cycle continues.

According to recent data, around 39% of the UK population has less than £1,000 in savings. So mortgage defaults won’t be far away if people find themselves without income.

That’s pretty much the worst-case scenario for Lloyds. But there are also some reasons to be positive about the business after a 15% decline from its recent highs.

Best in the business

The risk of rising mortgage defaults is real. But it’s an issue for the banking sector as a whole and Lloyds might well be in a better position than its rivals.

As well as the largest consumer deposit base, the bank also has some of the best loan-to-value ratios (LTV) in its mortgage book. That should help limit losses if things do start to go wrong.

When things get tough in an industry – whether it’s banking or anything else – the strongest operators often emerge in an even better position. And that might be the case with Lloyds.

That’s why it’s so important for investors to focus on businesses that have durable competitive strengths. In the context of UK banks, it’s hard to imagine a better candidate than Lloyds.

Buy now?

Lloyds shares are down 15% from their highs, but there’s no rule saying they can’t fall further. The stock still trades at a price-to-book ratio of 1.3, which is well above its five-year average.

Given this, I’m not looking to buy the stock right now. But bank stocks do tend to go through sharp drawdowns from time to time, so I think a better opportunity might come eventually.

When it does, I’ll look to be ready. Lloyds has some competitive advantages that I think will be important over the long term, so it’s on my list of stocks to keep an eye on for the time being.