The Lloyds (LSE:LLOY) share price fell 5.5% on 4 April 2025, extending losses triggered by former President Donald Trump’s announcement of a 10% tariff on UK imports. This decline reflects broader market jitters, with the FTSE 100 down 1% and European indexes faring worse. For Lloyds, the sell-off underscores concerns about macroeconomic challenges and their impact on bank profitability.

Tariff turbulence

Trump’s tariffs have intensified fears of a US recession, with Barclays analysts assigning a ‘high risk’ designation. For Lloyds, the immediate threat lies in dampened global trade activity and potential retaliatory measures, which could strain UK economic growth.

While Lloyds’ domestic focus insulates it from direct tariff exposure, secondary effects loom. This includes a weaker UK consumer outlook that might elevate loan defaults, pressuring net interest margins already under scrutiny.

For example, some British businesses — many of which are Lloyds loan customers — may have significant exposure to the US market. In certain cases, a 10% tariff on UK exports could be enough to tip these businesses into financial distress, potentially resulting in bad debt for the bank.

Valuation maths

Lloyds’ forward price-to-earnings (P/E) ratio sits at 9.9 times for 2025, above its five-year average and peers like Barclays (7.2 times) and HSBC (8.9 times). However, analysts project this multiple to compress to 6.5 times by 2027 as earnings per share (EPS) climbs to 10.67p. This implies a 2027 share price of £1.03 if current multiples hold.

However, the caveat is that Lloyds is more expensive than usual in 2025 because of an expected earnings blip, with impairment charges weighing on the year’s forecast. Investors will likely need proof of growth beyond 2027 in order to get near to that £1.03 mark.

The price-to-book (P/B) ratio tells a similar story: at 0.99 times for 2025, Lloyds trades near book value. However, this could dip to 0.83 times by 2027 as equity grows faster than share price. It’s undervalued compared to global peers but not far from its own historic averages.

Dividend resilience

Despite the sell-off, Lloyds’ dividend profile remains robust. The 2025 payout of 3.44p per share offers a 4.8% yield, with coverage improving as EPS rises. By 2027, dividends are projected to hit 4.64p, yielding 6.7% at current prices. Crucially, the payout ratio remains below 50%, balancing shareholder returns with capital retention for regulatory buffers.

Praying for a trade deal

Lloyds shares are heavily reflective of the condition of the UK economy. It doesn’t have an investment arm, so it’s really focused on lending. Following these tariffs, I’m struggling to work out whether Lloyds stock is now undervalued or whether I should buy more. However, I would say that a trade deal that reduces US tariffs on the UK will be very positive Lloyds. I’m keeping my fingers crossed that a deal can be reached soon.