Will the Lloyds share price fall to 50p in 2025 and should I buy the stock if it does?

It feels like a long time ago that investors were wondering when Lloyds Banking Group (LSE:LLOY) share price could take it to 50p. In fact, it only returned in March.

Since then, a lot has happened. The stock was one of the FTSE 100The best players of 2024, went over 60p last month. But the 12% drop just put it in a very interesting – and unusual – spot.

Back to 50p?

The biggest risk for Lloyds at the moment is the possibility of serious fines for mis-selling car loans. There is still an outside chance that this could happen, but it seems unlikely at this point.

Analysts currently estimate the cost could be as high as £3.9bn, roughly the same as the bank’s official Q3 profit. In that case, I think the stock could go back to 50p.

There is also the issue of interest rates, which have been falling recently. That generally means weaker profitability in loans and this was reflected in the company’s Q3 results.

The average interest rate between July and September was 2.95%, down from 3.08% last year. But the situation with interest rates is not always as straightforward as it seems.

Interest rates

In the short term, banks like Lloyds could actually benefit from falling rates. This is because the interest they earn on loans usually does not change, while the amount they pay on deposits does not.

If rates fall, the interest banks offer on quick access accounts can be adjusted quickly. But the amount a person pays on their mortgage is usually fixed over a period of time.

This is very important to Lloyds. Most of its income comes from loans 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 rise from the previous quarter.

Measurement

Lloyds shares currently trade at a price-to-book (P/B) ratio of 0.83. That’s not important in itself, but to compare it to NatWest Group reveal something interesting.

Lloyds vs. NatWest P/B ratio 2014-24

Created in TradingView

Over the past 10 years, Lloyds has been overvalued on a P/B basis. But this has changed recently – at 0.97, it is now NatWest’s top-trading share.

Both banks are subject to the same interest rate risks. And while NatWest doesn’t have the same exposure to car loans, it has its own problems to deal with.

This includes having the UK government as a major shareholder. Despite this, the stock trades at a higher P/B than Lloyds – and I think this is significant.

An opportunity?

Appropriate P/B ratios give a good idea of ​​how the market thinks about the risks that Lloyds and NatWest face. Unusually, investors are more concerned about the former right now.

My opinion is that there are better opportunities elsewhere. However, I think the relative discount means that Lloyds is the most attractive banking stock at the moment.

I wouldn’t be surprised to see the price drop to 50p by 2025. But it might take more than that to get me interested.