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Lloyds Banking Group‘s (LSE:LLOY) share price is up 13% so far this year.
It is jumping on signs that the Bank of England (BOE) will gradually ease over the next few years, boosting the economy and helping banks sell products.
Can Lloyds shares continue their spectacular rise? I’m not so sure. Here are four reasons why FTSE 100 the bank may be liquidated by 2025.
1. Interest rate shocks
It seems clear that, with Lloyds shares driven by expectations of a BoE rate cut, the failure of policy makers to act as expected could depress the price again.
Consumer inflation (CPI) fell sharply from a 41-year high of 11.1% in October 2022. The latest data showed it at 1.7%, finally below the BoE’s target of 2%.
But there are growing threats of inflation. Businesses are warning that their higher national insurance contributions announced in the Budget will push prices up.
Crushing US prices under new President Trump, rising oil prices due to conflicts in the Middle East, and continued wage growth may also contribute to inflation.
2. Economic recession
Optimism surrounding the UK economy has increased after the Office for Budget Responsibility (OBR) raised its growth forecasts for 2024 and 2025. Stronger GDP could translate into improved income and lower loan impairments for retail banks in general and Lloyds in particular.
But the outlook remains grim despite that, reflected in the OBR’s reduction in growth estimates from 2026.
Next year, new tax hikes could also hamper growth, as there could be major structural problems persisting such as labor shortages, weak productivity, high public debt and Brexit-related trade issues.
Furthermore, if inflation does not come down, the demand for GDP increases that the OBR has predicted this year and next may not materialize.
3. Home loan
Lloyds is the UK’s largest mortgage lender. This presents an opportunity as the housing market improves. But it also makes it vulnerable to more painful credit defaults.
The latest data from the Department of Justice this week painted a worrying picture in this regard. They showed mortgage applications increased by 56% between July and September, reaching 5,625.
Third quarter returns were the highest since 2019.
Many additional mortgage rate agreements will expire next year, and those funds also face significantly higher loan costs. This can mean more loan debt and repayment.
4. Vehicle finance penalties
Years after the PPI scandal, the banking industry is facing a new problem with claims of improper sales of car finance. Lloyds is one of the most exposed given its dominant position in the car loan market.
The bank has set aside £450m to cover possible fines. But recent developments suggest that it may be necessary to set aside much, much more.
Last month, the Court of Appeal ruled that banks must obtain express consent from customers before paying commissions to car dealers. This could result in a wave of claims running into the millions.
Analysts at RBC Capital predicted last month that Lloyds alone could pay £3.2bn. Forecasts are rising, and may continue to do so in the coming months.
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