Lloyds (LSE: LLOY) share price is trading up at levels not seen since early November 2008. But it is still under £1, which might seem counter-intuitively undervalued for one of the UK’s ‘Big Four’ banks.
The key point here for me is that a stock’s price is not the same as its value. This is because price is just an indication of what the market will pay for a share at any given time. But value reflects the true worth of the underlying business’s fundamentals.
Spotting the gap between price and value can deliver long-term profits. However, when risks begin to pile up, they can erode the very assumptions underpinning the valuation. In that case, investors may find themselves holding a share caught in a bearish trend — the hallmark of a value trap.
So, is the Lloyds share price a true bargain, or just a dangerous illusion of value?
Currently undervalued?
As a former senior investment bank trader, I found discounted cash flow (DCF) the best way to gauge true value. It uses future cash flow forecasts for a business to pinpoint the price at which its shares should trade.
In Lloyds’ case, it shows the stock is 33% undervalued at its current 96p price.
Therefore, its ‘fair value’ is £1.43.
The cash flow forecasts used here are based on consensus analysts’ projections. However, these do not incorporate the risks of events that have not happened yet. Nor can they reflect the full impact of events whose consequences are still playing out.
Apparent but unquantified risks
One risk is immediately apparent – the sub-£1 share price. Lloyds is too large to be classed as a ‘penny share’, yet it carries the same pricing volatility risk.
Even the smallest price move is magnified in its impact on the value of the holding. Here, every 1p shift equals a 1%+ change in value.
A broader risk is the compensation claims for historic motor finance mis-selling. Lloyds’ Q3 2025 results included an £800m charge for this, lifting total provisions to £1.95bn.
Yet the FCA scheme remains under consultation, leaving the final liability unresolved until rules are published in early 2026.
More risks on the horizon?
Even before this, Lloyds’s recent performance has been poor. Q3 profit before tax fell 36% year on year to £1.174bn, while earnings per share plunged 47% to 1p.
Costs jumped 37% to £3.177bn and return on tangible equity nearly halved to 7.5%. Unlike return on equity, ROTE excludes intangible elements such as goodwill.
To address rising costs, Lloyds is cutting 3,000 jobs and 289 branches over this year and next. This has stoked union tensions and carries with it reputational risk from fears of reduced customer service.
Meanwhile, its £4bn digital transformation brings with it execution risk, highlighted by widespread service outages in February 2025.
My investment view
I sold my Lloyds shares a considerable while ago, and I am glad I did. Recent performance has been poor, and the bank faces multiple risks with uncertain financial consequences.
Although DCF suggests value remains, those risks could render the apparent bargain an illusion once they unfold.
I see stronger opportunities in several other growth stocks offering clearer value and momentum.
