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Lloyds (LSE: LLOY), I believe it’s honest to say, had a very good run in 2024. The share worth is now 35% larger than it was only one 12 months in the past, with a 5% dividend yield besides.
But the Black Horse financial institution trades on a price-to-earnings (P/E) ratio of 8. That will make it look low cost, however I see plenty of dangers I worry may deliver the Lloyds share worth crashing down this 12 months – and put me off investing in it.
Weak unsure financial outlook might be unhealthy information for banks
First is the apparent one. The financial system. For now, it could not precisely be buzzing, however it’s at the least shifting alongside with out spluttering an excessive amount of.
I reckon that would change, although. There’s a excessive stage of geopolitical uncertainty that I worry may harm each company funding and shopper spending, each components that would result in a weaker financial system. That issues – heaps – for Lloyds as it’s the nation’s main mortgage lender.
Whereas I see that as a power if the financial system does properly, the reverse is true too. If mortgage defaults go up, earnings may fall dramatically We’ve been there earlier than – and we may get there once more.
The primary 9 months of final 12 months noticed post-tax earnings decline 12% year-on-year.
Automobile finance scandal may harm earnings
Some place else we’ve been earlier than is British banks having to pay out billions of kilos in compensation for mis-selling fee safety insurance coverage (PPI).
Seemingly, they didn’t study the lesson absolutely and one other shopper mis-selling scandal has arisen, this time within the automotive finance area. The influence of this might be large for the likes of automotive dealerships struggling to rearrange finance underneath an setting of tighter scrutiny.
However the banks is not going to get off scot-free. Final 12 months, Lloyds put aside a whole bunch of tens of millions of kilos for fines and compensation funds. It additionally scrapped commissions in its giant automotive finance arm, which may have long-term implications for the profitability of that enterprise.
As with PPI although, we don’t but know the way a lot fines and compensation could lastly add as much as as soon as the mud settles on all historic claims.
Right here’s why I’m not investing
Nonetheless, even after setting apart that cash final 12 months, Lloyds managed to make large (albeit diminished) earnings within the first 9 months, as I discussed above.
It has deep strengths together with well-known manufacturers, an enormous buyer base and a confirmed enterprise mannequin. The 35% rise previously 12 months may point out that many traders have scented a possible cut price.
However is the Lloyds share worth as low cost because it seems? That low P/E ratio may change at a stroke if earnings fell badly – a situation I believe may occur if both of the above dangers involves cross.
Within the present financial setting, I’m not investing in any financial institution shares – and that features Lloyds, for positive.