Here’s why it could soon be make-or-break time for the Lloyds share price

The biggest threat on the horizon for the Lloyds Banking Group (LSE: LLOY) share price has to be the car loan mis-selling scandal. And the horizon is getting pretty close, with the Supreme Court verdict expected in July.

The Financial Conduct Authority says the outcome will inform its next steps regarding any redress scheme. And it plans to make an anouncement within six weeks of the court decision.

It all comes with Lloyds shares close to a five-year high. There could be a lot riding on this.

Latest from Lloyds

Lloyds added no net remediation charges in the Q1. In the final 2024 quarter, a further £700m took the total provision to £1.15bn. To put it into some kind of perspective, it dropped the bank’s return on tangible equity for the year to 12.3% from the 14% we would have seen without it. That’s significant.

Firms that specialise in compensation claims are suggesting anyone who took out one of the contested loans could be due sums reaching thousands of pounds. The biggest figures I see bandied about suggest paydays of up to £4,000.

Martin Lewis of MoneySavingExpert.com fame has suggested a most likely total compensation outcome of billions to low tens of billions of pounds. But he sees a highest-case scenario reaching further into the tens of billions range.

Obviously, Lloyds wouldn’t shoulder anywhere near all of that. But Investors’ Chronicle has estimated Lloyds’ share of the UK car finance market as high as 35%. That could potentially mean a lot of cash to have to pay out.

Feeling the pain

If we go with a £10bn estimate for total redress, and assume Lloyds could shoulder 35% of it, or £3.5bn… That would treble the amount currently set aside. It could exceed an entire quarter’s net interest income, or £3.3bn recorded in Q1 this year.

It could be a painful amount for sure. But I think it’s unlikely to do lasting damage to Lloyds, as it might do with Close Brothers, also heavily involved in the case. The smaller bank has around 20% of its portfolio in car loans. And in 2024, it reported adjusted operating profit of £170m — tiny compared to the big players.

I’m not surprised to see the Close Brothers share price has slumped 70% in the past five years. Whether it’s low enough to consider buying now, or the risk is too high, I don’t know. I haven’t looked closely enough. But I do take one thing from it.

Smaller banks, challenger banks, banks in developing countries… they all have their investment attractions. But when it comes to a financial crisis, there’s no substitute for a fat healthy balance sheet.

What should we do?

As a shareholder, I’m cautiously optimistic that the damage won’t be long-lasting here. It surely can’t come close to some of the other crises Lloyds has managed to get into over the years. Can it?

But I do think the outcome could have a sharp short-term effect (of as-yet unknown direction) on the Lloyds share price. On balance, I’m happy to hold. But I’ll wait before I consider buying more.

The post Here’s why it could soon be make-or-break time for the Lloyds share price appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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