There’s little doubt that Lloyds Banking Group (LSE:LLOY) shares provide great worth on paper.

It appears to be like like a discount primarily based on predicted income — its price-to-earnings (P/E) ratio is 9.3 instances. The financial institution additionally gives respectable worth in view of predicted dividends, with its yield at a FTSE 100-beating 5.2%.

Lastly, with a price-to-book (P/B) ratio beneath one, Lloyds additionally trades at a slight low cost to the worth of its belongings.

However I don’t see Lloyds’ share price as an excellent discount. Moderately, my view is that the financial institution’s low-cost valuation displays the excessive threat it poses to buyers and its poor progress prospects wanting forward.

Listed below are 4 causes I’m avoiding the Black Horse Financial institution at this time.

1. Rising mortgage competitors

Indicators of restoration within the housing market are nice information for the UK’s largest mortgage supplier. House mortgage demand is recovering strongly as purchaser confidence improves.

Mortgage approvals for dwelling purchases leapt 28% 12 months on 12 months in December, authorities knowledge reveals.

Nonetheless, margins on this key product section are crumbling as competitors intensifies. Santander and Barclays have sliced some fastened mortgage charges to beneath 4% this week, whereas others are additionally chopping amid a race to the underside.

Lloyds can have no selection however to comply with the herd, lest it loses new consumers and re-mortgagers to its rivals.

2. Margin pressures

The outlook for Lloyds’ margins is already fairly gloomy because the Financial institution of England (BoE) ramps up rate of interest cuts.

Web curiosity margins (NIMs) at group stage have been wafer skinny within the third quarter of 2024, at 2.94%. They dropped 21 foundation factors 12 months on 12 months, and will plummet extra sharply if BoE charge reductions warmth up because the market expects. This would depart little-to-no room for income progress.

Consultants recommend rates of interest will decline to at the least 4% by the tip of December, down from 4.5% at this time.

3. Struggling economic system

On the brilliant facet, charge reductions will doubtless enhance Lloyds by supporting credit score demand and spending on different monetary merchandise. They might additionally scale back the extent of credit score impairments the financial institution endures.

But a dismal outlook for the UK economic system suggests it may nonetheless face points on each these fronts. The BoE’s determination to chop its 2025 progress forecasts by half (to 0.75%) is a worrying omen.

With the central financial institution additionally tipping inflation to rise once more, Lloyds faces a ‘stagflationary’ quagmire which will harm income past this 12 months. Main long-term structural points for the UK economic system embrace labour shortages, falling productiveness, and commerce tariffs.

4. Monetary penalties

The ultimate — and maybe largest menace — to Lloyds’ share price in 2025 is the potential for crushing misconduct fees.

To recap, the motor finance business is topic to a Monetary Conduct Authority (FCA) probe into potential mis-selling. Following a courtroom case final September, analysts assume lenders may very well be on the hook for tens of billions of kilos.

Because the business’s main participant, Lloyds — which made £15.6bn value of automobile loans within the first 9 months of 2024 — may very well be accountable for a big chunk of this. RBC Capital thinks the price to the financial institution may very well be an eye-watering £3.9bn, although bear in mind that estimates have been shifting greater in latest months.