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There’s little doubt that Lloyds Banking Group (LSE:LLOY) shares provide large worth on paper.
It appears to be like like a discount primarily based on predicted income — its price-to-earnings (P/E) ratio is 9.3 instances. The financial institution additionally gives first rate 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 beneath 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 discount. Reasonably, my view is that the financial institution’s low-cost valuation displays the excessive danger it poses to buyers and its poor development prospects wanting forward.
Listed below are 4 causes I’m avoiding the Black Horse Financial institution right now.
1. Rising mortgage competitors
Indicators of restoration within the housing market are nice information for the UK’s largest mortgage supplier. Dwelling mortgage demand is recovering strongly as purchaser confidence improves.
Mortgage approvals for house purchases leapt 28% 12 months on 12 months in December, authorities information reveals.
Nonetheless, margins on this key product section are crumbling as competitors intensifies. Santander and Barclays have sliced some fastened mortgage charges to beneath 4% this week, whereas others are additionally chopping amid a race to the underside.
Lloyds may have no selection however to observe 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 stage had been wafer skinny within the third quarter of 2024, at 2.94%. They dropped 21 foundation factors 12 months on 12 months, and will plummet extra sharply if BoE charge reductions warmth up because the market expects. This would go away little-to-no room for income development.
Specialists counsel rates of interest will decline to no less than 4% by the top of December, down from 4.5% right now.
3. Struggling economic system
On the brilliant facet, charge reductions will probably enhance Lloyds by supporting credit score demand and spending on different monetary merchandise. They may additionally cut back the extent of credit score impairments the financial institution endures.
But a dismal outlook for the UK economic system suggests it might nonetheless face points on each these fronts. The BoE’s choice to chop its 2025 development 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 harm income past this 12 months. Main long-term structural points for the UK economic system embrace 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 expenses.
To recap, the motor finance business is topic to a Monetary Conduct Authority (FCA) probe into potential mis-selling. Following a courtroom case final September, analysts assume lenders may very well be on the hook for tens of billions of kilos.
Because the business’s main participant, Lloyds — which made £15.6bn price of automotive loans within the first 9 months of 2024 — may very well be accountable for a big chunk of this. RBC Capital thinks the price to the financial institution may very well be an eye-watering £3.9bn, although remember that estimates have been shifting greater in current months.
