Lloyds (LSE:LLOY) shares have been on a roller coaster in 2026. For the year to date, they’re down 2%, though risks are mounting and I think the FTSE 100 bank could slide in May.
Here are three reasons why.
1. War threats
The clearest risk today is an escalation in the Iran war, worsening inflationary risks and slowing economic growth. Both threaten to derail earnings across the banking sector by affecting loan growth and raising impairments.
Rising inflation would be especially bad for Lloyds, given its place as Britain’s biggest mortgage provider. Latest Halifax data showed average house prices fell 0.5% in March as buyer demand dried up. If interest rates increase, home sales could slump and more than offset the boost that rate hikes provide to banks’ margins.
The UK economy is especially sensitive to events in the Middle East, due to factors like its large services economy, high energy imports, and already weak momentum. It’s not difficult to see how a long war could be catastrophic for Lloyds’ share price.
2. More bad motor news?
Last month, the Financial Conduct Authority (FCA) came up with a final compensation figure for past car loan misconduct. The total cost to lenders? £9.1bn, some £2bn less than had previously been suggested.
But the saga is far from over, and the possibility of higher thumping costs lingers.
Last week, Barclays raised its own provisions for customer compensation. This is now £430m, an increase of £105m. Might Lloyds do the same in the coming weeks and months? It wouldn’t be the first time — provisions have been hiked twice already to current levels of £2bn.
That’s not all, as lenders face court battles from customers seeking higher payouts that what the FCA determined. With 12.1m cases of mis-sold motor finance being recorded, the final bill could be astronomical.
3. Horribly expensive
These aren’t the only major risks facing Lloyds in the near-term and beyond. Its customer base and pricing power is being steadily eroded by the rising influence of challenger banks. Savers are moving from traditional deposit accounts to interest-bearing ones, hitting margins. There’s also the threat of costs running out of control as broader inflationary pressures rise.
This all leads me to the third threat to Lloyds shares: its enormous valuation. Are all of these dangers baked into the current share price? I don’t think so.
At 97.8p per share, the bank’s price-to-book (P/B) ratio is 1.4, above the long-term average of 0.9. This also shows Lloyds’ share price trading at a larger premium to balance sheet assets than the broader banking sector. A high valuation such as this leaves the firm especially vulnerable to a price correction.
There’s a lot I like about Lloyds. Its resilience in what’s been a tough period for the UK economy, for instance, and how its cash-rich balance sheet supports strong dividends. But the risks are rising sharply, and I can’t help but fear for Lloyds’ shares in the coming months.
