Lloyds‘ (LSE:LLOY) share price has been falling after it struck multi-year highs last month. At 96.6p per share, the FTSE 100 bank’s a good 14% cheaper than it was when it reached peaks of 112.6p on 3 February.
Of course long-term investors would still be sitting on a big fat profit. The shares are still 34% more expensive than they were a year ago. The question is, could the bank be at the beginning of a prolonged price correction?
Valuation creates risk
Putting my cards straight on the table, I think it’s a strong possibility. For me, the enormous valuations some retail banks command fails to reflect the growing risks they face.
Today Lloyds trades on a price-to-book (P/B) value of 1.4. That’s well above the 10-year average of 0.9, and shows the bank trading at a big premium to the value of its balance sheet assets.
There’s no doubting the bank’s excellent operational execution in tough times. Net income rose 7% over 2025 while pre-tax profit increased 12%. It has strong brand recognition to help it navigate market weakness, and an increased presence in fee-based services like credit cards and insurance should help things going forward.
But the bank faces growing dangers that threaten this resilience. Given that premium valuation, even small setbacks could yank Lloyds’ share price sharply lower.
Risks to Lloyds shares
One of my major concerns is a sharp downturn in the UK economy. Banks are highly cyclical and loan demand can sink and credit impairments shoot higher when conditions worsen.
The trouble is things in Britain are getting tougher. This week the Office for Budget Responsibility (OBR) slashed its domestic GDP growth forecasts for 2026, predicting expansion of just 1.1%, down from 1.4% it had predicted last year. And worryingly these estimates were made before the Middle East erupted into conflict.
As if this wasn’t enough, the OBR also raised its unemployment forecast. This is now tipped to peak at 5.3% in 2026, its highest in more than a decade. Again, this was made before the weekend’s military action.
In this landscape, it’s also possible the Bank of England slashes interest rates faster than currently expected to spur growth. This could have a devastating effect on retail banks by reducing their net interest margins (NIMs), a key measure of profitability.
Fortunately Lloyds has a so-called structural hedge that limits the impact of rate cuts. Still, the effect of BoE actions this year (and potentially beyond) could be significant for its bottom line.
Is the bank a possible buy?
With income and margins also under significant strain from growing competition, I think Lloyds could lose its lustre with investors in 2026. And this could have a massive impact on the bank’s share price.
With a strong balance sheet, Lloyds has scope for more significant share buybacks that could support the share price. But on balance, I think it could slump from current levels. I feel investors should consider avoiding the FTSE 100 stock today.
