Lloyds’ (LSE: LLOY) share price has dropped 6% from its 22 August 12-month traded high. I think part of this came from profit-taking. The other part followed a widely publicised proposal for the UK government to introduce a new tax on banking profits.
More specifically, the Institute for Public Policy Research (IPPR) said the levy was needed to offset the Bank of England’s quantitative easing programme. This provided government lending support for banks in the aftermath of the 2007/08 financial crisis. The IPPR says it is still costing taxpayers £22bn a year.
The Treasury said it did not comment on speculation over tax policy decisions.
I believe the lack of clarity here remains a key risk for the share price until it is resolved. That said, I think the question for investors is how it looks otherwise over the long term.
How does the core business look?
Lloyds largely dodged the proverbial bullet on 1 August with a ruling on alleged car insurance miss-selling by banks.
The UK’s Supreme Court said car dealers who sold the vehicles and arranged the finance did not owe fiduciary duties to customers. This reversed an earlier Court of Appeal ruling that could have resulted in multi-billion-pound compensation for customers.
The potential risk from the Court of Appeal ruling had overshadowed Lloyds’ previously solid 24 July H1 2025 results.
These saw statutory profit before tax rise 5% year on year to £3.5bn, exceeding analysts’ forecasts of £3.2bn.
Growth in mortgage lending and current account business had driven net interest income up 5% to £6.7bn. Consequently, Lloyds reaffirmed its £13.5bn net interest income forecast.
Consensus analysts’ forecasts are that Lloyds’ earnings will rise a healthy 11.8% a year to end-2027. And it is ultimately this growth that powers any business’s share price and dividends higher.
Are the shares cheap now?
The first part of my Lloyds’ share price assessment is comparing its key valuations with those of its competitors.
On the price-to-earnings ratio, Lloyds is second top of its peer group, trading at 11.6 against an average of 9.7. These banks comprise Barclays at 8.3, NatWest at 8.5, Standard Chartered at 9.5, and HSBC at 12.4.
So Lloyds is expensive on this measure.
The same is true on the price-to-book ratio, although less evidently, with Lloyds at 1 compared to its peers’ average of 0.9.
However, it is fairly valued on its price-to-sales ratio of 2.7 – the same as its competitor group’s average.
The second part of my assessment involves running a discounted cash flow (DCF) analysis. This determines where any firm’s share price should trade, derived from cash flows for the underlying business.
The DCF for Lloyds’ shares shows they are 41% undervalued at their current 79p price. Therefore, their fair value is £1.34.
Will I buy the stock?
I already hold two stocks in the sector – HSBC, and NatWest – and am not looking for another.
That said, even if I were, it would not be one priced at less than £1. This adds high price volatility risk to the other risks involved with any stock.
However, it may be worth the consideration of other less risk-averse investors.
