The Lloyds Banking Group (LSE:LLOY) share price has posted robust positive aspects coming into the ultimate quarter. Thus far in 2024, the FTSE 100 financial institution’s risen a formidable 23% in worth.

That’s higher than the 7% acquire the broader Footsie has loved over that point.

But at present costs, Lloyds shares nonetheless provide index-beating worth. It’s ahead price-to-earnings (P/E) ratio is 8.8 occasions, whereas the dividend yield‘s a wholesome 5.5%.

Nevertheless, the financial institution’s constantly appeared undervalued, which raises vital considerations for me. Its low valuation may very well be a justified reflection of the substantial dangers it presents as we method the top of the yr and head into 2025.”

Listed below are three the explanation why I’m steering away from Lloyds shares in October.

1. Slipping margins

Financial institution shares have risen on hopes of swingeing rate of interest cuts by means of 2024 and 2025. The idea is that credit score demand might decide up on this state of affairs, whereas mortgage impairments may erode as peoples’ funds enhance.

The difficulty is that revenue margins might additionally hunch because the Financial institution of England trims borrowing charges. Lloyds’ personal internet curiosity margin (NIM) was a razor-thin 2.94% as of June, down nearly 1 / 4 of a % yr on yr.

Banks’ margins aren’t simply endangered by altering financial coverage both. Excessive road veterans are additionally being squeezed by challenger and digital-led banks, who’re steadily increasing their product ranges to win clients from the likes of Lloyds.

2. Weak financial outlook

Though rates of interest look set to fall, earnings ranges might stay weak for UK-focused banks anyway because the home financial system struggles.

Britain’s financial system has flatlined for the final two months in a row, in line with official knowledge. And issues might stay troublesome if, as anticipated, October’s funds is a tricky one. On this state of affairs, mortgage impairments may additionally proceed to stream steadily increased for Lloyds and its friends.

With GDP progress of a meagre 1% predicted over the subsequent few years, cyclical shares like banks might face an actual struggle to develop earnings.

3. Automotive mortgage probe

My closing concern right here pertains to the UK regulator’s probe into potential motor finance misconduct. Lloyds has put aside £750m to cowl potential claims referring to the potential mis-selling of discretionary fee preparations (DCAs) previously.

However the invoice may very well be a lot greater, operating into the billions of kilos.

Such uncertainty prompted Citi final month to slash its ranking on Lloyds to Impartial from Purchase. With the FCA suspending its assessment till Might 2025, this uncertainty appears to be like to tug on and probably put big strain on Lloyds shares.

The DCA probe is an unlucky reminder of the £22bn Lloyds needed to pay for the PPI-misselling scandal earlier this century. These echoes bode badly for the financial institution and its share price.

So whereas Lloyds appears to be like good worth, I’d nonetheless quite purchase different low cost shares for my portfolio.