It feels like ages ago that investors were wondering when the Lloyds Banking Group (LSE:LLOY) share price would make it up to 50p. In reality, it was only back in March.
Since then, a lot has happened. The stock was one of the FTSE 100âs best performers of 2024, topping 60p last month. But a 12% drop has suddenly put it into very interesting â and unfamiliar â territory.
Back to 50p?
The big risk with Lloyds right now is the possibility of a serious fine for mis-selling car loans. Thereâs still an outside chance this could come to nothing, but it seems unlikely at this stage.
Analysts currently estimate the cost could be up to £3.9bn, which is roughly the same as the bankâs statutory profit for Q3. In that situation, I think the stock might well fall back to 50p.
Thereâs also the issue of interest rates, which have been falling recently. That typically means weaker profitability on loans and this showed up in the firmâs Q3 results.
Net interest margins between July and September were 2.95%, down from 3.08% the year before. But the situation with interest rates isnât always as straightforward as it seems.
Interest rates
In the short term, banks like Lloyds can actually benefit from rates falling. This is because the interest they earn on loans is typically fixed, while the amount they pay on deposits isnât.
When rates fall, the interest banks offer on instant access accounts can be adjusted almost immediately. But the rate someone pays on their mortgage is typically fixed for a period of time.
This is especially relevant to Lloyds. The majority of its income comes from mortgages and it has the largest share of consumer deposits in the UK.
Investors should therefore be careful not to oversimplify things. While interest rates fell in Q3, Lloyds saw its margins increase from the previous quarter.
Valuation
Lloyds shares currently trade at a price-to-book (P/B) ratio of 0.83. Thatâs not significant on its own, but comparing it to NatWest Group reveals something interesting.
Lloyds vs. NatWest P/B ratio 2014-24
Created at TradingView
Over the last 10 years, Lloyds has consistently been more expensive on a P/B basis. But this has changed recently â at 0.97, itâs now NatWest shares that trade at a higher multiple.
Both banks are subject to the same interest rate risks. And while NatWest doesnât have the same exposure to motor loans, it has its own issues to deal with.
These include having the UK government as a substantial shareholder. Despite this, the stock is trading at a higher P/B multiple than Lloyds â and I think this is significant.
Opportunity?
The respective P/B ratios give a good idea of how the market is thinking about the risks Lloyds and NatWest are facing. Unusually, investors are more concerned about the former right now.
My own view is that there are better opportunities elsewhere. However, I think the relative discount means Lloyds is the more attractive bank stock at the moment.
I wouldnât be surprised to see the share price drop to 50p in 2025. But it would probably take a bit more than that to get me interested.
The post Will the Lloyds share price drop to 50p in 2025 and should I buy the stock if it does? appeared first on The Motley Fool UK.
But there may be an even bigger investment opportunity thatâs caught my eye:
Investing in AI: 3 Stocks with Huge Potential!
🤖 Are you fascinated by the potential of AI? 🤖
Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.
If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investmentâ¦
Then you won’t want to miss this special report inside Motley Fool Share Advisor – ‘AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!
And today, we’re giving you exclusive access to ONE of these top AI stock picks, absolutely free!
Get your free AI stock pick
More reading
Hereâs the growth forecast for Lloyds shares through to 2026!
Where will the Lloyds share price be on 1 January?
Is a Bank of England rate cut good for the Lloyds share price?
Near a 6-month low! Can a move to digital help shore up Lloydsâ share price?
Should I buy Lloyds shares for the 6.1% dividend yield in 2025?
Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
