Should cheap Lloyds shares be on investors’ shopping lists in February?

Lloyds’ shares look cheap across a variety of metrics. So what’s the catch? Royston Wild takes a look at the FTSE bank.

| More on:
Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds Banking Group (LSE:LLOY) has enjoyed an electrifying start to 2025. At 62.5p per share, the FTSE 100 bank has risen a whopping 13.4% in value in just a handful of weeks.

Yet even accounting for this rise, the Lloyds share price looks dirt cheap. At least on paper, that is.

Its price-to-earnings (P/E) ratio for this year’s a modest 9 times. But the Black Horse Bank doesn’t just look cheap based on predicted profits. With a price-to-book (P/B) ratio of 0.9, it trades at a slight discount to the value of its assets.

Throw a 5.5% forward dividend yield into the mix too, and Lloyds shares seem to offer terrific all-round value.

However, it’s important to remember that a cheap share price is common among high-risk companies and/or those with poor growth prospects. With this in mind, should investors consider cut-price Lloyds shares next month?

Growth issues

Times are tough for the high street banks. And things could get more difficult as subdued economic conditions dampen credit demand among consumers and businesses. On top of this, the traditional lenders’ margins are under threat as the Bank of England (BoE) gears up to make further interest rate cuts and market competition increases.

Lloyds’ net interest margin (NIM) — the difference between what it charges borrowers and the interest it pays savers — dropped to a wafer-thin 2.94% as of September. It could plummet in 2025 if the BoE’s ratesetters (likely) slash interest rates multiple times this year.

Lloyds chief executive Charlie Nunn has tipped three interest rate reductions by the end of December.

Cost-cutting increases

In this environment, retail banks have little room to grow earnings. So in recent days, Lloyds has announced more branch closures to give the bottom line a boost and further its pivot to digital banking. By next March, the bank plans to shutter another 136 branches to reduce its cost base. This will take the number of Lloyds, Halifax and Bank of Scotland branches to 757, down significantly from 2,200 a decade ago.

As I say, the overall loan outlook for the bank’s pretty gloomy. However, signs of recovery in the housing market are a good omen for its mortgage unit. Lloyds is the UK’s most popular residential home loan provider with a market share of around 19%.

Car crash coming?

Based on all the above, I feel investors should think about buying other value shares instead. And especially when I get onto potentially the biggest threat to Lloyds in the short-to-medium term.

As a major car finance provider, Lloyds faces potentially billions of pounds in fines if found guilty of mis-selling motor loans. HSBC thinks the Financial Conduct Authority probe into the non-disclosure of dealer commissions could cost the sector a staggering £44bn.

If so, this could cause shockwaves for Lloyds’ profits, dividends and, as a consequence, share price. The bank might be cheap, but I think this reflects the high degree of risk it poses.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »

Investing Articles

Here’s why AstraZeneca stock jumped nearly 6% in the FTSE 100 today

FTSE 100 heavyweight AstraZeneca helped propel the blue-chip index to a record high today. Here's what investors were cheering.

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »