These 5 red flags mean I’m avoiding Lloyds shares like the plague!

Lots of investors are considering buying Lloyds shares following recent price weakness. Royston Wild explains why they might want to think again.

| More on:

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.

Middle-aged white man pulling an aggrieved face while looking at a screen

Image source: Getty Images

Market sentiment towards UK banks is souring, with Lloyds (LSE:LLOY) shares falling 5% in the past month. Here are five reasons why I believe the FTSE 100 bank could keep dropping.

1. UK growth

Growth, or lack of it, is one issue. Britain’s economy is going backwards, official data showed zero growth in January versus the 0.1% GDP rise in December. And that was before the war in the Middle East started.

Things could get much worse for the UK if the war pushes inflation skywards, the Bank of England raises interest rates, and consumer confidence sinks. In this scenario Lloyds’ revenues could fall off a cliff, while impairments — which increased to a sizeable £795m in 2025 — could also rise sharply.

2. Housing market potential plunge

Growing inflationary threats mean the interest rate cuts tipped recently are now a pipe dream. It’s unlikely that reductions will happen if oil prices remain elevated or rise further from recent multi-year highs. As I say, rates might even head higher.

And this creates obvious dangers for the housing sector. This is a critical earnings driver for Lloyds more than any other bank (it commands around 20% of the market). Don’t be shocked if the bank’s share price plummets if homebuyer activity starts to weaken.

3. Motor finance costs

Uncertainty continues over the final bill Lloyds faces from mis-selling car loans. After the Supreme Court ruled certain arrangements “unfair and unlawful” last year, the bank’s raised the amount it’s set aside to cover claims twice — from £450m to £1.15bn, and then again to £1.95bn in October.

The saga isn’t over yet and further hefty provisions could be punished by the market.

4. Rising competition

Challenger banks have soared in popularity over the last decade. With their cutting-edge platforms and market-leading products, they’ve put margins and revenues at traditional banks under significant pressure.

The problem for Lloyds and its peers is that the threat is rising. More than 60% of gross lending to small businesses is now provided by challengers, a record high. And these newer banks are undertaking massive fundraising to fuel their attacks on the established operators.

5. High valuation

Even after recent declines, Lloyds’ share price still looks expensive at 95.8p today. The bank trades on a price-to-book (P/B) ratio of 1.3. That’s above the long-term average of 0.9, and shows it trading at a premium to the value of its balance sheet assets.

This gives plenty of scope for further price weakness if news flow continues to spook investors.

Bottom line

I’m not saying everything is bleak over at Lloyds. The FTSE 100 bank could receive a big profit boost if interest rates rise to control inflation, boosting its net interest margins (NIMs). It’s also Britain’s biggest digital bank, and its ongoing digitalisation drive puts it in better shape to fend off its competitors.

Yet on balance, I still believe Lloyds shares are in danger of a sharp correction. It may be worth consideration from less risk-averse stock pickers, but I’d rather buy other UK shares today.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended 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

Night Takeoff Of The American Space Shuttle
Growth Shares

How UK investors can get access to the $2trn SpaceX stock IPO TODAY

Investors in the UK can get exposure to space powerhouse SpaceX today via several investment trusts that trade on the…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Down 23% from its highs, I’ve just bagged myself a FTSE 100 bargain!

Stephen Wright has seized the opportunity to buy shares in a FTSE 100 company with outstanding growth prospects at an…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

How to turn an empty ISA into £100 a month in passive income

Stephen Wright outlines how real estate investment trusts can help UK investors aim for £100 a month in passive income…

Read more »

Man riding the bus alone
Investing Articles

Down 23%! Should I buy Meta Platforms for my ISA or SIPP?

Meta stock looks undervalued after sliding steadily lower since last summer. But should I buy the social media giant for…

Read more »

A rear view of a female in a bright yellow coat walking along the historic street known as The Shambles in York, UK which is a popular tourist destination in this Yorkshire city.
Investing Articles

£5,000 invested in Greggs shares 2 years ago is now worth…

Anyone who bought Greggs' shares two years ago will now be sitting on heavy losses. Is there potential for a…

Read more »

Investing Articles

10 days to the next stock market crash?

What happens to the stock market when the current ceasefire in the Middle East expires? And what should investors do…

Read more »

Middle-aged Caucasian woman deep in thought while looking out of the window
Investing Articles

How to try and double the State Pension with just £30 a week

By saving money each week and investing regularly, even someone without a lot of cash to spare can aim to…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

2 badly beaten-down small caps to consider for a £20,000 Stocks and Shares ISA

Ben McPoland highlights a pair of UK small caps that have sold off heavily, making them worth considering for a…

Read more »