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Lloyds Banking Group (LSE:LLOY) shares are in an interesting situation right now. The stock has done well in 2024, rising about 14%.
By 2025 however, the threat of potential debt in relation to car loans has weighed on Lloyds’ share price. So how should investors think about stocks in terms of valuation?
Bank shares in 2024
In general, UK banks have performed well compared to other banks FTSE 100 in 2024. Barclays has seen the share price rise by nearly 70% since the start of the year as well NatWestincreased by more than 80%.
Compared to this, the 14% gain in Lloyds shares doesn’t seem so impressive. And looking at the valuation multiples at which stocks are trading gives a good idea of why.
Lloyds vs. Barclays vs. NatWest P/B multiple 2024
Created in TradingView
All banks are trading at higher price-to-book (P/B) multiples than they did at the start of the year. But both Barclays and NatWest saw bigger increases than Lloyds.
This is a sign that investors feel less optimistic about Lloyds compared to other UK banks now than they did in January. And it’s not that hard to see why.
Car loans
An investigation into the practices of selling loaned cars looks set to create huge debts for lenders. And Lloyds is more exposed to the sector than Barclays or NatWest.
The scale of the threat is not yet clear, but top estimates are around £3.9bn. Another way to look at this in the context of dividends is the bank paying its shareholders.
Banking is a cyclical industry, so the distribution of shareholders varies from year to year. But over the past decade, Lloyds has returned a total of £13.9bn.
Lloyds Banking Group dividends paid to shareholders in 2015-24
Created in TradingView
In this context, the £3.9bn fine looks like a lot – more than 25% of the profits paid by the company over the past decade. But the question is whether the current share price already includes this.
Is stock money?
Lloyds currently has a market capitalization of around £33bn. So if investors receive £10bn in dividends (the amount from the last 10 years minus the penalty) over the next decade, that would mean an average yield of around 3%.
That doesn’t seem like an obvious bargain. But I have made a few pessimistic assumptions that you should be aware of to try to leave the kind of safety I look for in investments.
Another is that I assume the maximum possible loan size for a car loan. It is certainly possible that the end result could be better than that of Lloyds.
The other thing is that I think the next decade will be almost the same as the last decade in terms of dividends. Investors may think that higher interest rates should result in better returns from banks.
2025 vision
Given the uncertainty of car loans, I don’t see Lloyds shares as an obvious buying opportunity to consider. But I also don’t think that investors who own the stock should rush to consider selling.
Despite lagging peers in 2024, Lloyds’ share price still holds a 14% gain. I think it’s fairly priced at 55p.
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