It seems like ages in the past that buyers have been questioning when the Lloyds Banking Group (LSE:LLOY) share price would make it up to 50p. In actuality, it was solely again in March. 

Since then, so much has occurred. The inventory was one of many FTSE 100’s greatest performers of 2024, topping 60p final month. However a 12% drop has all of a sudden put it into very attention-grabbing – and unfamiliar – territory.

Again to 50p?

The large threat with Lloyds proper now’s the opportunity of a critical positive for mis-selling automotive loans. There’s nonetheless an out of doors likelihood this might come to nothing, however it appears unlikely at this stage.  

Analysts presently estimate the price might be up to £3.9bn, which is roughly the identical because the financial institution’s statutory revenue for Q3. In that scenario, I believe the inventory would possibly nicely fall again to 50p.

There’s additionally the problem of rates of interest, which have been falling lately. That usually means weaker profitability on loans and this confirmed up within the agency’s Q3 outcomes.

Web curiosity margins between July and September have been 2.95%, down from 3.08% the yr earlier than. However the scenario with rates of interest isn’t at all times as simple because it appears.

Rates of interest

Within the quick time period, banks like Lloyds can truly profit from charges falling. It’s because the curiosity they earn on loans is usually mounted, whereas the quantity they pay on deposits isn’t. 

When charges fall, the curiosity banks supply on prompt entry accounts may be adjusted nearly instantly. However the fee somebody pays on their mortgage is usually mounted for a time frame.

That is particularly related to Lloyds. The vast majority of its revenue comes from mortgages and it has the biggest share of client deposits within the UK.

Buyers ought to due to this fact watch out to not oversimplify issues. Whereas rates of interest fell in Q3, Lloyds noticed its margins improve from the earlier quarter.

Valuation

Lloyds shares presently commerce at a price-to-book (P/B) ratio of 0.83. That’s not important by itself, however evaluating it to NatWest Group reveals one thing attention-grabbing.

Lloyds vs. NatWest P/B ratio 2014-24

Created at TradingView

During the last 10 years, Lloyds has constantly been costlier on a P/B foundation. However this has modified lately – at 0.97, it’s now NatWest shares that commerce at the next a number of.

Each banks are topic to the identical rate of interest dangers. And whereas NatWest doesn’t have the identical publicity to motor loans, it has its personal points to take care of.

These embrace having the UK authorities as a considerable shareholder. Regardless of this, the inventory is buying and selling at the next P/B a number of than Lloyds – and I believe that is important.

Alternative?

The respective P/B ratios give a good suggestion of how the market is considering the dangers Lloyds and NatWest are going through. Unusually, buyers are extra involved concerning the former proper now.

My very own view is that there are higher alternatives elsewhere. Nevertheless, I believe the relative low cost means Lloyds is the extra enticing financial institution inventory for the time being. 

I wouldn’t be shocked to see the share price drop to 50p in 2025. However it might most likely take a bit greater than that to get me .