The FTSE 100 has risen virtually 7% within the 12 months thus far as demand for blue-chip bargains has risen. Low cost Lloyds Banking Group (LSE:LLOY) shares have risen an even-more-impressive 17%, reflecting enhancing temper music across the UK’s financial and political panorama.

But right now, this excessive avenue financial institution’s shares nonetheless look low cost. They commerce on a price-to-earnings (P/E) ratio of 8.5 instances, which is properly beneath the Footsie common above 15 instances.

Lloyds shares additionally supply glorious worth on paper from a dividend perspective. Its 5.8% dividend yield is way forward of the three.6% common for Britain’s large-caps.

To high issues off, the Footsie financial institution can also be undervalued relative to the worth of its property. Because the chart reveals, its price-to-book (P/B) ratio is comfortably beneath the worth watermark of 1.

On the intense aspect

Lloyds’ share price has mainly risen on enhancing hopes for the UK financial system. With progress selecting up and rates of interest falling, traders are extra bullish on the agency’s revenues outlook and impairment forecasts.

The IMF’s choice to improve British GDP forecasts final week additional boosted market confidence. Progress of 1.1% is now predicted for 2024, up considerably from 0.4% beforehand.

Lloyds shares have risen too, amid indicators of a gradual restoration within the housing market. That is particularly essential to this financial institution given its standing because the nation’s largest dwelling mortgage supplier.

Potential automobile crash

Nevertheless, there are additionally vital dangers going through Lloyds within the brief time period and past. The truth is, I concern they may immediate a pointy re-rating given the financial institution’s current share price soar.

One massive and rising menace is the potential for substantial monetary penalties if discovered responsible of overcharging on automobile loans. Issues have turn out to be extra precarious after Friday’s Courtroom of Attraction ruling that motor sellers’ commissions needs to be authorized by debtors earlier than execution.

Lloyds’ share price has fallen sharply following the information. It’s put aside £450m to cowl claims, however might face a considerably greater invoice working into billions.

It stated right now that final Friday’s ruling “sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision.”

Lloyds added it’s “assessing the potential impact of the decisions, as well as any broader implications.” This uncomfortable reminder of the costly PPI scandal after 2008 might have related opposed penalties for the Black Horse Financial institution.

Too dangerous

Whereas vital, this isn’t the one large threat to Lloyds and its share price proper now.

Margins are being impacted because the Financial institution of England cuts charges and competitors in UK banking heats up. These dropped 20 foundation factors to 2.94% in quarter three, and will have a lot additional to fall.

Keep in mind too, that the UK’s financial restoration stays on fragile floor. A spread of things, from the fallout of this week’s Funds to the US Presidential election in November, might hurt progress and with it the fortunes of cyclical banks.

I believe the hazards of proudly owning Lloyds shares outweigh the potential rewards, even at right now’s price.