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He Lloyds Banking Group (LSE:LLOY) share price has seen strong gains entering the latest quarter. So far in 2024, the FTSE 100 The bank's value increased by an impressive 23%.
That's bigger than the 7% gain the Footsie has enjoyed overall over that time.
However, at current prices, Lloyds shares still offer value that beats the index. Its forward price-to-earnings (P/E) ratio is 8.8 times, while the dividend yield is a healthy 5.5%.
However, the bank's shares have always seemed 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 will stay away from Lloyds shares in October.
1. Sliding margins
Bank stocks have risen on hopes of sharp interest rate cuts through 2024 and 2025. The theory is that credit demand could rise in this scenario, while loan impairments may also erode as improve people's finances.
The problem is that profit margins could also fall as the Bank of England cuts borrowing rates. Lloyds' own net interest margin (NIM) was a meager 2.94% in June, almost a quarter of a percentage point lower year-on-year.
Bank margins are also not threatened simply by a change in monetary policy. High street veterans are also coming under pressure from challenger, digital-led banks, which are steadily expanding their product ranges to win over customers like Lloyds.
2. Weak economic outlook
Although interest rates look set to fall, revenue levels may remain weak for UK-focused banks anyway as the national economy struggles.
The British economy has stagnated for the last two consecutive months, according to official data. And things could remain difficult if, as expected, the October budget is tight. In this scenario, loan impairments could also continue to rise steadily for Lloyds and its peers.
With GDP growth of a meager 1% forecast for the next few years, cyclical stocks like banks could face a real struggle to grow profits.
3. Research on car loans
My final concern here relates to the UK regulator's investigation into possible misconduct in car finance. Lloyds has set aside £750m to cover potential claims relating to the possible mis-selling of discretionary commission arrangements (DCAs) in the past.
But the bill could be much higher, running into billions of pounds.
Such uncertainty caused Citi last month to cut its rating on Lloyds to Neutral from Buy. With the FCA postponing its review until May 2025, this uncertainty looks set to drag on and possibly put enormous pressure on Lloyds shares.
The DCA investigation is an unfortunate reminder of the £22bn Lloyds had to pay over the PPI mis-selling scandal earlier this century. These echoes bode poorly for the bank and its share price.
So although Lloyds appears to be good value for money, I prefer to buy other cheap shares for my portfolio.