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The FTSE 100 main index of shares has had an excellent 12 months, up to now. Up 7.8%, some high quality shares have rightly soared in worth following years of underperformance.
However amid the investor buzz, some overhyped names have additionally soared in worth. This, I believe, leaves them at risk of a extreme correction in 2025 if the market wises up.
Lloyds (LSE:LLOY) is one FTSE 100 share I’ll be avoiding just like the plague. For my part, its 15.1% share value rise this 12 months fails to replicate three large risks it faces in 2025 and doubtlessly past.
Pink lights flashing
The primary is the worsening outlook for the UK financial system. In information which shocked the Metropolis, GDP information on Friday (13 December) confirmed the financial system shrank for the second straight month in October.
Amid these toughening circumstances, Lloyds — which reported mortgage development of simply 1% final quarter — might discover it even harder to extend enterprise. Added to this, credit score impairments may additionally speed up as Britons battle to make ends meet.
On the plus aspect, a possible fall in rates of interest might stimulate credit score demand. However on the similar time this creates one other giant downside for banks, specifically a gradual fall in web curiosity margins (NIMs).
The menace to margins can be rising as challenger banks and constructing societies roll out ultra-attractive merchandise in new areas.
Latest NIM information is already alarming. Lloyds’ third-quarter NIM slumped 21 foundation factors in Q3 to 2.94%.
Automobile crash
The ultimate menace to Lloyds and its share value is doubtlessly essentially the most extreme. In a narrative paying homage to the fee safety insurance coverage (PPI) scandal earlier this century, motor finance suppliers face doubtlessly crushing penalties if discovered responsible of mis-selling loans.
To recap, the Monetary Conduct Authority (FCA) is probing commissions paid from lenders to automotive sellers with out clients’ data. And the potential for thumping penalties has soared after the Court docket of Enchantment in October dominated customers couldn’t have consented to those ‘hidden’ funds.
The numbers being recommended are actually staggering. The Financial institution of England says monetary redress throughout the trade might whole £25bn. Different analysts put it even greater, with some estimating it might be double that.
Lloyds has put aside £450m up to now to cowl potential prices. However given its place as a major automotive finance supplier — it instructions round a 3rd of the market — the eventual penalty might be considerably bigger.
It’s one I’m avoiding
There are some chinks of sunshine for Lloyds amid the gloom nonetheless. The housing market’s regular restoration is encouraging given the financial institution’s place as a significant mortgage supplier. Efforts to digitalise its operations are additionally paying off, with 22m of its 27m clients now logging on to financial institution.
Lloyds’ low price-to-earnings (P/E) ratio of 8.4 occasions might additionally proceed to draw consideration from cut price hunters.
However on steadiness, the opportunity of Lloyds’ share value struggling a correction after this 12 months’s good points stay too nice for me. And even when it doesn’t stoop, the potential for additional rises in 2025 look extraordinarily restricted, for my part.
So I’d moderately purchase FTSE 100 shares with higher funding potential within the new 12 months.
