What’s gone wrong with Lloyds shares to trigger a shock 15% slump?

Since a 52-week peak above 114p in February, Lloyds Banking Group (LSE: LLOY) shares have fallen 15%.

Shareholders are still sitting on a five-year gain of 130% — plus dividends. We’ve done pretty well, really. When I first bought Lloyds shares they were on a price-to-earnings (P/E) ratio of only about six. Now that’s up to 14, so I’m really not complaining.

But when everything seemed to be going swimmingly well, we now have this. So what’s happening?

Middle-East fallout?

It’s easy to point the finger at the ongoing war in Iran. And, well, there surely is some merit in thinking that way. The conflict has already sent oil prices climbing past $100 per barrel, before they fell back to around $90.

While not as bad as it has been, expensive oil is not going to do Western economies much good. We’re all braced for the seemingly inevitable new round of inflation to come. And the Office for Budget Responsibility recently cut its 2026 UK GDP growth forecast to just 1.1%, down from 1.4%.

Renewed economic uncertainty pretty much always sends tremors through the financial sector. Pockets squeezed by price rises can mean falling mortgage demand — and even cause a rise in bad debts. It’s not just Lloyds either — Barclays and NatWest have both tumbled too.

Overvalued?

Even before this latest global shock, I’ve been seeing Loyds shares as at least fully valued. I reckon bank share valuations should really be a bit below the FTSE 100 average. And that’s because they’re essentially exposed to troubles in any sector — after all, finance underpins every sector.

We’ve been looking at a price-to-book value of around 1.4 for Lloyds, which is definitely on the historically high side. Its average typically tends to be around 0.9–1.

Then there’s the Lloyds dividend yield. During the banking slump of a few years ago, it was one of the hottest on the FTSE 100. And bargain-hunting income seekers couldn’t get enough of it. Today we’re looking at a modest forecast of only 3.7%.

Perfect storm

None of this made me think, even for a moment, of selling my Lloyds shares. Selling when shares are a bit toppy, and buying when they’re only just good value… well, that’s the way to kill long-term profits by racking up transaction charges.

Most shareholders, it seems, saw the valuation of Lloyds shares as within a reasonable range, provided things kept going smoothly. And by smoothly, that includes earnings growth forecasts that would drop the P/E under nine by 2027. And for my money, that would make Lloyds a very tempting Buy consideration by then.

Those forecasts will need updating now, and the just-about-balanced applecart has been upset a bit.

What now?

I don’t see any reason to panic here at all. In fact, this has probably been a reasonable correction that’s got the Lloyds share price closer to fair valuation.

In my view, Lloyds remains good long-term value. And I reckon investors should consider buying on the dips.

The post What’s gone wrong with Lloyds shares to trigger a shock 15% slump? appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc 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.

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