The Lloyds (LSE:LLOY) share price had a pretty good run this year, climbing by 12.3%. This is far better than the FTSE 100, which only returned 4.9%.
However, the company’s shares haven’t fared so well since October, when they were trading as high as 62.2p. This represented a 29.4% return from the start of 2024.
But in late October, the UK Court of Appeal ruled that lenders who paid commissions to car dealers without the borrower’s knowledge acted unlawfully. Lloyds is at the centre of this scandal as the owner of the UK’s largest auto lender, Black Horse, which holds about £15bn in car loans.
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The company had already set aside £450m to cover the cost of this when the Financial Conduct Authority (FCA) opened its investigation in February. However, it’s estimated that its fine could go into the billions.
Since then, its shares have declined by 13.2%, and are currently trading at 53.96p. It has still been a solid investment for 2024, but the feeling has soured in the last couple of months.
However, this is the past, and I want to analyse what I think 2025 holds for Lloyds shares.
The bull case
There are a few reasons to like the company’s shares.
First, Lloyd’s latest quarterly results were decent, posting a profit before tax of £1.8bn. While this was a 2% year-on-year decline, it still beat the consensus forecast of £1.6bn.
Second, as interest rates fall, demand for credit will rise. Therefore, the company could see an increase in the number of loans it provides.
Third, the UK Supreme Court permitted lenders to appeal the Court of Appeals ruling on the motor finance scandal. This will be heard in the first four months of 2025. If the ruling is overturned, it could quash investor concerns on the matter.
The bear case
Aside from the motor finance scandal mentioned above, a couple of other factors could hinder the performance of the bank’s shares in 2025.
While a fall in interest rates could increase the number of borrowers, it will also mean that Lloyd’s net interest income (NII) could be hampered next year. This is the bank’s largest source of income; therefore, a rate cut will impact its earnings. With NII already down 6% in the quarter, it’s difficult to see how this will improve when interest rates fall. Many expect the Bank of England to cut rates multiple times next year.
Moreover, the UK economy hasn’t had the greatest news recently. Inflation is starting to creep back up and the economy shrank in October. In fact, one of the country’s leading business groups, the CBI, stated, “The economy is headed for the worst of all worlds”, after conducting its latest company survey. This could be an obstacle for people taking out loans in the coming year, a challenge Lloyds shareholders should consider.
Verdict
Overall, Lloyds shares are already trading at a dirt-cheap valuation, with a forward price-to-earnings (P/E) ratio of 7.7, so I don’t see its shares moving too far down.
However, the motor finance scandal will loom over the company, at least for the start of next year. Furthermore, even if this wasn’t a problem, I believe Lloyds will struggle to improve its results in a low-interest environment. Therefore, I see its shares falling to around the 50p mark in 2025.
