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It has been a rewarding 12 months for the banking giant's shareholders Lloyd's (LSE: LLOY). Not only was Lloyds' share price up 22%, but FTSE 100 The stock currently offers a dividend yield of 5.5%.
However, in five years the proportion has fallen by 13%. Longer term, well… Lloyds shareholders may not care to be reminded of the value destruction caused since the millennium, when Lloyds shares changed hands for more than £3 each.
cheap valuation
Still, while it's been a tough few decades, the current share price looks cheap by some metrics.
In my opinion, the price-earnings ratio of less than eight looks like a potential bargain. For bank stocks, a more common valuation metric is book value. Once again, Lloyds shares look cheap.
With the country's largest mortgage portfolio, a collection of well-known brands and a strong recent track record of profitability, there is an argument that Lloyds' share price should justifiably be higher than it is.
I think that's potentially true. However, I see risks, and failing to manage them properly has seriously harmed Lloyds in the past.
Here are two that are stopping me from buying bank shares right now despite the potential value on offer.
Review of car finance fees adds risks
The FCA has been carrying out a review of the fees historically charged in the car finance industry.
In the first nine months of this year, Lloyds recognized remediation costs of £124m in relation to this. It is not an insignificant amount, but it is comfortably manageable for Lloyds.
However, since its third quarter update in September, another court ruling has raised the specter that banks, including Lloyds, could face much higher costs in relation to this review than had previously been expected.
To some extent, we have been through this before with British banks and the mis-selling of PPI (payment protection insurance). For now, there is no specific reason to expect the scale of the motor finance commission's remediation costs to be as high as it was for PPI.
But we don't know what the final cost will be, and if the court ruling is upheld on appeal, that may mean the cost could be much higher than previously expected.
This could be detrimental to the black bank's profits and helps explain why Lloyds' share price has fallen 15% in just over a month.
Real estate market concerns
How is the real estate market and what could happen next?
That's a question rarely far from the minds of some Lloyds shareholders, given the bank's exposure to the sector through its large mortgage portfolio.
Both earnings and book value depend on the valuation assumptions in that book being correct. If either is revised downwards, because property prices fall or mortgage defaults rise (or both), the apparent bargain offered by Lloyds' current share price may be less of a bargain than expected. what it seems at first glance.
For now, the housing market is still doing quite well despite higher interest rates. But if that gets worse, I see a risk to Lloyds' investment case.
