Is Lloyds’ share price the FTSE 100’s worst value trap?

Lloyds Banking Group‘s (LSE:LLOY) share price has gone gangbusters in 2025. And yet on paper, it still looks like one of the FTSE 100‘s greatest value shares.

But I’m not convinced. In my view, Lloyds shares are dirt cheap for a reason.

Here’s why I wouldn’t touch the Black Horse bank with a bargepole today.

All-round cheapness

Up 62% since 1 January, the FTSE bank still trades on price-to-earnings growth (PEG) ratios of below 1 for every year through to 2027:

A reminder that any sub-1 reading implies a share is undervalued relative to expected profits.

Lloyds price-to-earnings (P/E) ratio of 12.1 times for this year is less impressive. However, this is still below the FTSE 100’s forward average of 12.5 times.

Besides, this figure topples to 9.3 times and then 7.8 times for 2026 and 2027 respectively.

Finally, Lloyds shares also offer great value based on expected dividends over the period:

Cash rewards are tipped to increase rapidly during the next few years. Consequently, dividend yields rise sharply above the FTSE 100’s long-term average of 3% to 4%.

Opportunities

So why are Lloyds shares so cheap, then? My view is that the bank’s low valuation reflects its long record of mediocre returns. Through a combination of share price gains and dividends, it’s provided a average annual return of just 4.5% since 2015.

Compare that to the broader FTSE 100, whose total yearly return is 8.5%. It’s no wonder that the market’s put such a deep discount on Lloyds’ shares.

Yet past performance isn’t always a reliable guide to the future. And it’s possible that Lloyds’ share price and dividends may have reached a turning point in 2025 that continues over the next decade.

The bank could certainly benefit from a period of greater inflation that boosts interest rates. A higher Bank of England benchmark rate can significantly boost retail banks’ net interest margins (NIMs).

Lloyds will also benefit from digital investment that’s reducing costs and bolstering its online banking proposition.

Challenges

Having said that, the bank also faces similar challenges to those that have sapped returns since 2015. Britain’s economy is in low-growth mode and tipped to remain there amid structural challenges like productivity issues, trade obstacles, and rising public debt.

Unlike most other FTSE banks, Lloyds doesn’t have overseas operations or investment banking operations to offset weakness at home and drive earnings.

The high street bank also faces rapidly growing competition from challenger banks and building societies. And in an era of higher interest rates, it may experience less mortgage demand, a key area of profitability. It may experience an upsurge in home loan defaults.

And finally, Lloyds remains at the mercy of severe regulatory and political challenges. Like its peers, it faces a potentially thumping windfall tax at this month’s Budget. It’s also battling to contain financial penalties related to a car finance mis-selling scandal.

Based on all this, I’m not surprised Lloyds shares remain so cheap. I’d personally much rather find other UK shares to buy.