Picture supply: Getty Pictures
Lloyds (LSE: LLOY), I believe it’s truthful to say, had a great run in 2024. The share worth is now 35% increased than it was only one yr in the past, with a 5% dividend yield besides.
But the Black Horse financial institution trades on a price-to-earnings (P/E) ratio of 8. Which will make it look low-cost, however I see various dangers I concern may carry the Lloyds share worth crashing down this yr – and put me off investing in it.
Weak unsure financial outlook could possibly be dangerous information for banks
First is the plain one. The economic system. For now, it could not precisely be buzzing, however it’s a minimum of shifting alongside with out spluttering an excessive amount of.
I reckon that would change, although. There’s a excessive degree of geopolitical uncertainty that I concern may damage each company funding and client spending, each elements that would result in a weaker economic system. That issues – tons – for Lloyds as it’s the nation’s main mortgage lender.
Whereas I see that as a power if the economic system does properly, the reverse is true too. If mortgage defaults go up, earnings may fall dramatically We’ve been there earlier than – and we may get there once more.
The primary 9 months of final yr noticed post-tax earnings decline 12% year-on-year.
Automotive finance scandal may damage earnings
Elsewhere we’ve been earlier than is British banks having to pay out billions of kilos in compensation for mis-selling cost safety insurance coverage (PPI).
Seemingly, they didn’t be taught the lesson totally and one other client mis-selling scandal has arisen, this time within the automobile finance area. The affect of this could possibly be large for the likes of automobile dealerships struggling to rearrange finance below an surroundings of tighter scrutiny.
However the banks is not going to get off scot-free. Final yr, Lloyds put aside lots of of hundreds of thousands of kilos for fines and compensation funds. It additionally scrapped commissions in its giant automobile finance arm, which may have long-term implications for the profitability of that enterprise.
As with PPI although, we don’t but understand how a lot fines and compensation could lastly add as much as as soon as the mud settles on all historic claims.
Right here’s why I’m not investing
Nonetheless, even after setting apart that cash final yr, Lloyds managed to make large (albeit decreased) earnings within the first 9 months, as I discussed above.
It has deep strengths together with well-known manufacturers, an unlimited buyer base and a confirmed enterprise mannequin. The 35% rise prior to now yr may point out that many traders have scented a possible cut price.
However is the Lloyds share worth as low-cost because it appears to be like? That low P/E ratio may change at a stroke if earnings fell badly – a state of affairs I believe may occur if both of the above dangers involves go.
Within the present financial surroundings, I’m not investing in any financial institution shares – and that features Lloyds, for positive.
