Lloyds Banking Group‘s (LSE:LLOY) share price has risen an impressive 13% so far this year.
It’s leapt on signs that the Bank of England (BOE) will steadily fall over the next couple of years, boosting the economy and helping banks sell products.
Can Lloyds shares continue their impressive ascent? I’m not so sure. Here are four reasons why the FTSE 100 bank could slide in 2025.
1. Interest rate disappointment
It seems obvious that, with Lloyds’ shares driven by hopes of BoE rate cuts, that a failure by policymakers to act as expected could pull the share price lower again.
Consumer price inflation (CPI) has fallen sharply from the 41-year highs of 11.1% in October 2022. Latest data showed it at 1.7%, finally under the BoE target of 2%.
But there are growing threats to inflation’s downward decline. Businesses are warning that their higher national insurance contributions announced in the Budget will pump up prices.
Crushing US tariffs under new President Trump, rising oil prices due to the Middle East conflict, and persistent wage growth could also impact inflation.
2. Worsening economy
Optimism surrounding the UK economy has risen after the Office for Budget Responsibility (OBR) hiked its growth forecasts for 2024 and 2025. Stronger GDP would likely feed into improved revenues and lower loan impairments for retail banks in general and Lloyds specifically.
But the outlook remains tough despite that, which was reflected in the OBR cutting its growth estimates from 2026.
For next year, fresh tax hikes could also hamper growth, as could major ongoing structural problems like labour shortages, weak productivity, high public debt and Brexit-related trade issues.
What’s more, if inflation doesn’t come down, the GDP demand boost the OBR has predicted for this year and next could might not happen.
3. Bad home loans
Lloyds is by far the UK’s biggest home loans provider. This presents opportunity as the housing market improves. But it also leaves it vulnerable to more painful loan impairments.
Latest Ministry of Justice data this week painted a worrying picture on this front. They showed mortgage repossession claims leaping 56% between July and September, to 5,625.
Third-quarter repossessions were at their highest since 2019.
Many more fixed-rate mortgage deals will end next year, and those refinancing also face significantly higher loan costs. This could mean more loan arrears and repossessions.
4. Motor finance penalties
Years after the PPI scandal, the banking sector faces a fresh crisis over claims of mis-selling motor finance. Lloyds is one of the most exposed given its large position in the car loan market.
The bank has set aside £450m to cover potential penalties. But recent developments suggest it may have to set aside much, much more.
Last month, the Court of Appeal ruled that banks should have obtained explicit consent from customers before paying commissions to car retailers. This could trigger a wave of claims that go into the billions.
RBC Capital analysts predicted last month that Lloyds alone may have to pay £3.2bn. Forecasts are creeping up, and could continue to do so in the months ahead.
