4 good the reason why I am avoiding low-cost Lloyds shares just like the plague!

There’s little doubt that Lloyds Banking Group (LSE:LLOY) shares provide great worth on paper.

It seems to be like a cut price based mostly on predicted income — its price-to-earnings (P/E) ratio is 9.3 instances. The financial institution additionally provides 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 property.

However I don’t see Lloyds’ share worth as a superb cut price. Slightly, 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 as we speak.

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 residence purchases leapt 28% yr on yr in December, authorities information reveals.

Nevertheless, margins on this key product section 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 may have no selection however to observe the herd, lest it loses new consumers 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 charge reductions warmth up because the market expects. This would depart little-to-no room for income progress.

Consultants counsel rates of interest will decline to no less than 4% by the top of December, down from 4.5% as we speak.

3. Struggling financial system

On the brilliant facet, charge reductions will possible 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 dismal outlook for the UK financial system suggests it may nonetheless face points on each these fronts. The BoE’s determination 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 harm income past this yr. Main long-term structural points for the UK financial system embody labour shortages, falling productiveness, and commerce tariffs.

4. Monetary penalties

The ultimate — and maybe largest risk — to Lloyds’ share worth in 2025 is the potential for crushing misconduct expenses.

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 suppose lenders may very well be on the hook for tens of billions of kilos.

Because the trade’s main participant, Lloyds — which made £15.6bn price of automobile 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 bear in mind that estimates have been shifting greater in current months.