It feels like ages ago that investors were wondering when the Lloyds Banking Group (LSE:LLOY) share price would make it up to 50p. In reality, it was only back in March. 

Since then, a lot has happened. The stock was one of the FTSE 100’s best performers of 2024, topping 60p last month. But a 12% drop has suddenly put it into very interesting – and unfamiliar – territory.

Back to 50p?

The big risk with Lloyds right now is the possibility of a serious fine for mis-selling car loans. There’s still an outside chance this could come to nothing, but it seems unlikely at this stage.  

Analysts currently estimate the cost could be up to £3.9bn, which is roughly the same as the bank’s statutory profit for Q3. In that situation, I think the stock might well fall back to 50p.

There’s also the issue of interest rates, which have been falling recently. That typically means weaker profitability on loans and this showed up in the firm’s Q3 results.

Net interest margins between July and September were 2.95%, down from 3.08% the year before. But the situation with interest rates isn’t always as straightforward as it seems.

Interest rates

In the short term, banks like Lloyds can actually benefit from rates falling. This is because the interest they earn on loans is typically fixed, while the amount they pay on deposits isn’t. 

When rates fall, the interest banks offer on instant access accounts can be adjusted almost immediately. But the rate someone pays on their mortgage is typically fixed for a period of time.

This is especially relevant to Lloyds. The majority of its income comes from mortgages and it has the largest share of consumer deposits in the UK.

Investors should therefore be careful not to oversimplify things. While interest rates fell in Q3, Lloyds saw its margins increase from the previous quarter.

Valuation

Lloyds shares currently trade at a price-to-book (P/B) ratio of 0.83. That’s not significant on its own, but comparing it to NatWest Group reveals something interesting.

Lloyds vs. NatWest P/B ratio 2014-24

Created at TradingView

Over the last 10 years, Lloyds has consistently been more expensive on a P/B basis. But this has changed recently – at 0.97, it’s now NatWest shares that trade at a higher multiple.

Both banks are subject to the same interest rate risks. And while NatWest doesn’t have the same exposure to motor loans, it has its own issues to deal with.

These include having the UK government as a substantial shareholder. Despite this, the stock is trading at a higher P/B multiple than Lloyds – and I think this is significant.

Opportunity?

The respective P/B ratios give a good idea of how the market is thinking about the risks Lloyds and NatWest are facing. Unusually, investors are more concerned about the former right now.

My own view is that there are better opportunities elsewhere. However, I think the relative discount means Lloyds is the more attractive bank stock at the moment. 

I wouldn’t be surprised to see the share price drop to 50p in 2025. But it would probably take a bit more than that to get me interested.