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The Lloyds Banking Group (LSE:LLOY) share price has posted strong gains entering the final quarter. So far in 2024, the FTSE 100 bank’s risen an impressive 23% in value.
That’s greater than the 7% gain the broader Footsie has enjoyed over that time.
Yet at current prices, Lloyds shares still offer index-beating value. It’s forward price-to-earnings (P/E) ratio is 8.8 times, while the dividend yield‘s a healthy 5.5%.
However, the bank’s consistently appeared undervalued, which raises significant concerns for me. Its low valuation could be a justified reflection of the substantial risks it presents as we approach the end of the year and head into 2025.”
Here are three reasons why I’m steering clear of Lloyds shares in October.
1. Slipping margins
Bank shares have risen on hopes of swingeing interest rate cuts through 2024 and 2025. The theory is that credit demand could pick up in this scenario, while loan impairments may also erode as peoples’ finances improve.
The trouble is that profit margins could also slump as the Bank of England trims borrowing rates. Lloyds’ own net interest margin (NIM) was a razor-thin 2.94% as of June, down almost a quarter of a percent year on year.
Banks’ margins aren’t just endangered by changing monetary policy either. High street veterans are also being squeezed by challenger and digital-led banks, who are steadily expanding their product ranges to win customers from the likes of Lloyds.
2. Weak economic outlook
Although interest rates look set to fall, income levels may remain weak for UK-focused banks anyway as the domestic economy struggles.
Britain’s economy has flatlined for the last two months in a row, according to official data. And things could remain difficult if, as expected, October’s budget is a tough one. In this scenario, loan impairments might also continue to stream steadily higher for Lloyds and its peers.
With GDP growth of a meagre 1% predicted over the next few years, cyclical shares like banks could face a real fight to grow earnings.
3. Car loan probe
My final concern here relates to the UK regulator’s probe into potential motor finance misconduct. Lloyds has set aside £750m to cover possible claims relating to the potential mis-selling of discretionary commission arrangements (DCAs) in the past.
But the bill could be much bigger, running into the billions of pounds.
Such uncertainty prompted Citi last month to slash its rating on Lloyds to Neutral from Buy. With the FCA postponing its review until May 2025, this uncertainty looks to drag on and possibly put huge pressure on Lloyds shares.
The DCA probe is an unfortunate reminder of the £22bn Lloyds had to pay for the PPI-misselling scandal earlier this century. These echoes bode badly for the bank and its share price.
So while Lloyds looks good value, I’d still rather buy other cheap shares for my portfolio.
