Should cheap Lloyds shares be on investors’ shopping lists in February?

Lloyds Banking Group (LSE:LLOY) has enjoyed an electrifying start to 2025. At 62.5p per share, the FTSE 100 bank has risen a whopping 13.4% in value in just a handful of weeks.

Yet even accounting for this rise, the Lloyds share price looks dirt cheap. At least on paper, that is.

Its price-to-earnings (P/E) ratio for this year’s a modest 9 times. But the Black Horse Bank doesn’t just look cheap based on predicted profits. With a price-to-book (P/B) ratio of 0.9, it trades at a slight discount to the value of its assets.

Throw a 5.5% forward dividend yield into the mix too, and Lloyds shares seem to offer terrific all-round value.

However, it’s important to remember that a cheap share price is common among high-risk companies and/or those with poor growth prospects. With this in mind, should investors consider cut-price Lloyds shares next month?

Growth issues

Times are tough for the high street banks. And things could get more difficult as subdued economic conditions dampen credit demand among consumers and businesses. On top of this, the traditional lenders’ margins are under threat as the Bank of England (BoE) gears up to make further interest rate cuts and market competition increases.

Lloyds’ net interest margin (NIM) — the difference between what it charges borrowers and the interest it pays savers — dropped to a wafer-thin 2.94% as of September. It could plummet in 2025 if the BoE’s ratesetters (likely) slash interest rates multiple times this year.

Lloyds chief executive Charlie Nunn has tipped three interest rate reductions by the end of December.

Cost-cutting increases

In this environment, retail banks have little room to grow earnings. So in recent days, Lloyds has announced more branch closures to give the bottom line a boost and further its pivot to digital banking. By next March, the bank plans to shutter another 136 branches to reduce its cost base. This will take the number of Lloyds, Halifax and Bank of Scotland branches to 757, down significantly from 2,200 a decade ago.

As I say, the overall loan outlook for the bank’s pretty gloomy. However, signs of recovery in the housing market are a good omen for its mortgage unit. Lloyds is the UK’s most popular residential home loan provider with a market share of around 19%.

Car crash coming?

Based on all the above, I feel investors should think about buying other value shares instead. And especially when I get onto potentially the biggest threat to Lloyds in the short-to-medium term.

As a major car finance provider, Lloyds faces potentially billions of pounds in fines if found guilty of mis-selling motor loans. HSBC thinks the Financial Conduct Authority probe into the non-disclosure of dealer commissions could cost the sector a staggering £44bn.

If so, this could cause shockwaves for Lloyds’ profits, dividends and, as a consequence, share price. The bank might be cheap, but I think this reflects the high degree of risk it poses.

The post Should cheap Lloyds shares be on investors’ shopping lists in February? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.