The FTSE 100 is stacked with cheap quality shares following the recent market sell-off. High street bank Lloyds (LSE:LLOY) is one blue chip whose shares offer exceptional all-round value, at least on paper.
At 66.1p per share, Lloyds’ share price commands a price-to-earnings (P/E) ratio of 8.7 times for 2025. Meanwhile, its P/E-to-growth (PEG) ratio is, at 0.5, some distance below the value watermark of 1.
Finally, its forward dividend yield is 5.4%, suggesting the possibility of above-average passive income streams.
Should you invest £1,000 in Lloyds Banking Group right now?
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Yet I won’t touch Lloyds with bargepole right now. Profits could jump if the UK economy rebounds, and the firm leverages its winning brand to grow revenues. But it also faces a serious of significant challenges today and in the long term, two of which I’ll describe below.
1. House of cards?
The mortgage market is a key profits driver for Lloyds. Its market share towers above the competition, and recent housing industry data suggests homebuyer demand remains pretty buoyant.
Yet the company’s dominance in the home loans segment is under threat as lenders kick off a new ‘mortgage rate war.’ Lloyds — whose margins are already under substantial pressure — may have to keep slicing loan rates if it wishes to keep attracting property buyers and existing homeowners.
This week Barclays became the latest lender to slash rates on some fixed-term products to 4%. This first move by a fellow major player has led to speculation of a spate of similar action from other loan providers.
The danger to Lloyds could be even more significant and long lasting, too, if (as expected) the challenger banks turn their attention here. Changes to UK capital rules last autumn give the smaller players added scope to launch an attack on the mortgage sector.
2. Car trouble
The greatest threat to Lloyds’ profits (and its share price) in 2025 could be the issuing of huge financial penalties from the Financial Conduct Authority (FCA).
Misconduct fines can be a regular annoyance for investors in bank shares. But the ones facing Lloyds — on this occasion related to the mis-selling of motor loans — could be truly staggering. Some analysts have put the total cost at above £40bn, bringing back painful memories of the PPI scandal.
As the sector’s biggest lender, Lloyds would likely be on the hook for the majority of any final bill. So far it’s set aside £1.2bn to cover any future costs, compared with £195m and £165m at Santander and Close Brothers, respectively.
The Supreme Court is currently deciding whether discretionary commissions in car loans are legal, following an appeal by lenders last year to a previous case. The decision could cause an earthquake for banks’ profits.
Lloyds shares might be cheap at current prices. But I feel this is a fair reflection of the huge and numerous risks it poses to investors, so I’d rather go shopping for other cheap stocks today.
