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The Lloyds (LSE:LLOY) share price has nearly doubled from its lows in 2023, reaching levels not seen in a decade. This has been driven by a combination of robust lending growth, strong net interest margins, and a generally stable UK banking sector.
However, beneath the surface, there are several factors that could threaten this momentum and potentially lead to a sharp reversal in the share price. While I remain positive on Lloyds, investors should always remain vigilant.
Some Q1 wobbles
Lloyds reported a 7% decrease in statutory profit after tax for the first quarter of 2025, primarily due to increased operating costs and higher impairment charges. While net income grew by 4% year on year, and net interest income rose by 3%.
The FTSE 100 bank is facing persistent cost inflation and rising provisions for potential credit losses. These challenges have not derailed management’s confidence, with guidance reaffirmed for 2025 and 2026, but they highlight the delicate balance Lloyds must maintain between growth and profitability.
Low on diversification
A major concern is Lloyds’ heavy reliance on the UK economy. The domestic focus means that any slowdown in UK growth, a dip in housing activity, or a spike in loan defaults could have an outsized impact. Recent GDP data may erode economic and investor sentiment, and the IMF’s forecast for 2025 is modest.
What’s more, Lloyds doesn’t have an investment arm. It’s predominantly a lender. This means it’s much more sensitive to changes in interest rates and fluctuations in the UK economy.
Another risk is regulatory uncertainty, particularly regarding the ongoing court case over mis-selling of motor finance. In a worst-case scenario, this could cost Lloyds billions in compensation. This could weigh heavily on future earnings and investor sentiment. While the bank has set aside provisions, the final outcome remains unpredictable.
It’s not all bad
But there’s still a lot to celebrate. Lloyds maintains a strong capital position, with a CET1 ratio of 13.5%, and continues to generate solid returns on tangible equity. The bank is also executing share buybacks and maintaining a progressive dividend policy, which has helped support the share price.
Analyst sentiment is mixed, with most experts rating the stock as a Hold but with only one negative rating. The price targets ranging from a potential 30% fall to a 38% gain. The average share price target suggests the stock is undervalued by around 6%.
Broadly, the consensus opinion is reflective of my own thoughts. Under the base case scenario for the UK economy and interest rates, I believe Lloyds will continue to perform well. It’s also broadly trading in line with its peers in the UK, while being much cheaper than its US counterparts. It’s currently trading at 11.7 times forward earnings, but this will fall substantially in the medium term.
However, its share price is vulnerable to shifts in the UK economic landscape, interest rate changes, and regulatory developments. Nonetheless, I believe it’s worth considering for the long run. I would consider adding to my holding if I wasn’t already heavily invested in UK stocks.
