Across a wide range of metrics, Lloyds (LSE:LLOY) shares look dirt cheap even after their stunning price gains in 2025.
The bank’s price-to-earnings (P/E) ratio is an undemanding 10.2 times, while its P/E-to-growth (PEG) ratio of 0.6 is even more impressive. Any reading below one indicates a share is cheap relative to predicted profits.
Its price-to-book (P/B) multiple also falls under the benchmark of one, at 0.9.
Yet even these numbers aren’t enough to encourage me to invest. Indeed, I believe Lloyds’ low valuation instead reflects its uncertain profits (and by extension share price) outlook.
Here are three reasons why I’m avoiding the FTSE 100 bank like the plague.
1. Home discomforts
The Black Horse Bank is by some distance the UK’s largest mortgage provider. In fact, its share of the market has risen in recent years, from 18% in 2021 to 20% last year. This reflects in part Lloyds’ evergreen brand strength.
But as with its other product lines, competition from fellow high street banks, building societies, and challenger banks is rising sharply. Not only is there an arms race as to who can offer the lowest rates, but lenders are using other innovative ways to court customers.
Last week, April Mortgages launched its 100% (or ‘no deposit’) loan that doesn’t require borrowers to provide collateral. Earlier in May, Skipton Building Society launched its ‘deferred payment’ mortgage which delays repayments for three months.
Lloyds may have to respond aggressively to maintain its robust market position, which could come at the expense of margins.
2. Tough economic backcloth
Cyclical shares like banks rely on strong economic conditions to grow margins. So news last week that Britain’s economy grew 0.7% in quarter one (up from 0.1% the prior quarter) gave a boost to investor confidence.
However, analysts and economists don’t think it’s time to break out the champagne just yet. That first-quarter beat reflects in part businesses bringing forward investment to avoid potential US tariffs, meaning quarter two’s figure could be more subdued.
At the same time, corporate confidence remains low, the cost-of-living crisis drags on, and unemployment numbers are rising again. And beyond the near term, the outlook remains clouded as structural issues (like low productivity, skills shortages, and post-Brexit trade frictions) persist.
And Lloyds doesn’t have significant overseas operations to offset weakness at home.
3. Penalty points
Finally, I fear that the FTSE 100 bank faces a colossal bill if an investigation into motor finance arrangements goes the wrong way.
In July, the Supreme Court will decide whether secret commissions between banks and auto dealers are against customers’ best interests. If it upholds the Court of Appeal’s ruling last year, Lloyds — which has set aside £1.1bn to cover potential costs — could be especially vulnerable.
Tom Smith, a partner at law firm Reed Smith, has predicted a “shockwave” to lenders and the broader economy. Some analysts put the eventual bill as high as £50bn.
Lloyds could be on the hook for a huge slice of these penalties, too, given its number one position in the market. This could have a significant impact on dividends as well as the bank’s share price.
Conversely, a decision in favour of Lloyds could send its shares through the roof. But it’s a risk I’m not prepared to take.
