The Lloyds Banking Group (LSE:LLOY) share price has enjoyed strong gains in 2024. At 53p per share, it’s up 10.1% since 1 January.
But the FTSE 100 bank’s fallen sharply since the end of October. This negative momentum is a bad omen for existing investors heading into 2025.
So what does the New Year hold for the Black Horse Bank? And should I buy Lloyds shares for my portfolio?
The new PPI scandal?
Let’s begin by exploring the recent drop in its share price.
You’ll probably remember the mis-selling scandal that rocked the banking industry during the 2010s. Firms were found guilty of wrongly selling payment protection insurance (PPI) on an industrial scale. Lloyds alone was on the hook for a jaw-dropping £21.9bn.
Today another mis-selling story is spooking investors, this time concerning the sale of motor finance. It’s early days, but investors fear another expensive scandal is brewing, one in which Lloyds is once again said to be a major player.
The Footsie bank set aside £450m to cover potential costs from a Financial Conduct Authority (FCA) investigation. But it’s put this under review following a recent court ruling: in short, this deemed commission from lenders to car dealers without customers knowing to be illegal.
RBC Bank analysts think Lloyds may have to cough up to £3.9bn in penalties. This would be small potatoes in comparison to the PPI scandal. Yet the problem isn’t going away soon, and estimates could continue to rise. This could keep Lloyds’ share price under significant pressure.
Trouble elsewhere
The car finance saga may be the biggest influence on Lloyds shares next year. But it’s not the only worry I have.
My other concerns include:
- A combination of weak loan growth and rising credit impairments as the UK economy struggles.
- Slumping net interest margins (NIMs) as the Bank of England cuts interest rates.
- The threat posed by challenger banks and building societies to customer demand and margins.
There are patches of light amid the gloom, however. A steady housing market recovery is a good sign for Lloyds. The bank’s digital transformation initiatives should also continue to bear fruit.
But on balance, I think Lloyds and its share price could face a tough time in 2025.
Here’s what I’m doing
That’s not to say that City analysts currently share my pessimistic take. The 18 number crunchers with ratings on the bank have slapped a 12-month price target of 64.94p per share on the bank.
That represents an 22% premium to current levels.
Yet on the other hand, those 18 analysts are hardly spinning cartwheels over Lloyds. Ten have slapped a Hold rating on the firm. One considers it to be a Sell. Only seven believe it to be a Buy.
This matches the broader market’s lukewarm view of the bank, as reflected by its rock-bottom valuation. A forward price-to-earnings (P/E) ratio of 8.1 times is well below the FTSE 100 average of 14.3 times.
I believe the market and the City may take an increasingly bearish view of Lloyds, which in turn could push its share price sharply lower.
All things considered, I’d rather buy other cheap UK shares right now.
