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There’s little doubt that Lloyds Banking Group (LSE:LLOY) shares supply great worth on paper.
It appears to be like like a cut price primarily based on predicted earnings — its price-to-earnings (P/E) ratio is 9.3 instances. The financial institution additionally affords respectable worth in view of predicted dividends, with its yield at a FTSE 100-beating 5.2%.
Lastly, with a price-to-book (P/B) ratio under one, Lloyds additionally trades at a slight low cost to the worth of its belongings.
However I don’t see Lloyds’ share value as an excellent cut price. Somewhat, my view is that the financial institution’s low-cost valuation displays the excessive threat it poses to traders and its poor progress prospects wanting forward.
Listed here are 4 causes I’m avoiding the Black Horse Financial institution at present.
1. Rising mortgage competitors
Indicators of restoration within the housing market are nice information for the UK’s largest mortgage supplier. House mortgage demand is recovering strongly as purchaser confidence improves.
Mortgage approvals for residence purchases leapt 28% yr on yr in December, authorities knowledge reveals.
Nonetheless, margins on this key product phase are crumbling as competitors intensifies. Santander and Barclays have sliced some fastened mortgage charges to under 4% this week, whereas others are additionally chopping amid a race to the underside.
Lloyds can have no selection however to comply with the herd, lest it loses new patrons and re-mortgagers to its rivals.
2. Margin pressures
The outlook for Lloyds’ margins is already fairly gloomy because the Financial institution of England (BoE) ramps up rate of interest cuts.
Internet curiosity margins (NIMs) at group degree had been wafer skinny within the third quarter of 2024, at 2.94%. They dropped 21 foundation factors yr on yr, and will plummet extra sharply if BoE price reductions warmth up because the market expects. This would depart little-to-no room for earnings progress.
Specialists counsel rates of interest will decline to a minimum of 4% by the tip of December, down from 4.5% at present.
3. Struggling economic system
On the brilliant aspect, price reductions will seemingly increase Lloyds by supporting credit score demand and spending on different monetary merchandise. They might additionally scale back the extent of credit score impairments the financial institution endures.
But a depressing outlook for the UK economic system suggests it might nonetheless face points on each these fronts. The BoE’s choice to chop its 2025 progress forecasts by half (to 0.75%) is a worrying omen.
With the central financial institution additionally tipping inflation to rise once more, Lloyds faces a ‘stagflationary’ quagmire that will injury earnings past this yr. Main long-term structural points for the UK economic system embody labour shortages, falling productiveness, and commerce tariffs.
4. Monetary penalties
The ultimate — and maybe largest risk — to Lloyds’ share value in 2025 is the potential for crushing misconduct prices.
To recap, the motor finance trade is topic to a Monetary Conduct Authority (FCA) probe into potential mis-selling. Following a court docket case final September, analysts assume lenders could possibly be on the hook for tens of billions of kilos.
Because the trade’s main participant, Lloyds — which made £15.6bn price of automotive loans within the first 9 months of 2024 — could possibly be accountable for a big chunk of this. RBC Capital thinks the associated fee to the financial institution could possibly be an eye-watering £3.9bn, although bear in mind that estimates have been transferring greater in latest months.
