Is the car loan pressure on Lloyds shares really finally over?

Lloyds Banking Group (LSE: LLOY) shares gained 3% early Wednesday (8 October), as the next act in the car loan mis-selling drama unfolds.

The bank said it “notes the recent FCA announcement … on an industry-wide redress scheme for motor finance.”

Lloyds is “currently assessing the implications and impact … and will update the market as and when appropriate.”

Car loan redress

The day before, Financial Conduct Authority (FCA) CEO Nikhil Rathi said: “It’s time their customers get fair compensation.” But it sounds like it might be less than borrowers had hoped.

The FCA had previously indicated average compensation approaching Â£950 per customer. It’s now airing a sum of around Â£700.

But total industry payouts could still reach Â£8.2bn, as the FCA suggests around 44% of motor finance agreements since 2007 could be eligible.

Perhaps unsurprisingly, the Finance and Leasing Association — representing the lending industry — thinks that’s too much. Director Adrian Dally told the BBC the number of people lined up for a potential payout “seems implausibly high“.

Not over yet

So to answer my headline question, no, it’s not all over yet.

But this is a key milestone, bringing us closer to quantifying the damage. Removing so much uncertainty must be a relief for shareholders. It is for me — I still had a nagging fear the FCA could come down a lot harder than we’d expected.

The decision also sets a timescale for the final curtain. By various routes, depending on individual cases, car loan customers will have 12 months from the start of the scheme to make their claims. So it’s going to take at least that long before the final cost can be totted up.

What to do next?

I doubt this will make any real difference to shareholders. Those who didn’t like the look of things and decided to sell will surely have already sold. And those of us who held… well, I can only speak for myself, but the latest events reinforce my decision.

What about those thinking of buying, but holding off until this thing plays out?

For me, it would be based on the same factors as ever. That’s the current valuation, the dividend yield, the forecasts, and the long-term future of the banking sector. To put the last first, banking is an essential for every aspect of modern life and business — and that’s not going to change.

Valuation, valuation

Looking at the rest, a forecast price-to-earnings (P/E) ratio of 12 for the current year looks a bit high. Analysts see it dropping to 7.5 by 2027, and I’d rate that as cheap again. But a lot can happen between now and then, especially with the economy still in such a poor state. And Lloyds is very much exposed to where interest rates go.

The predicted 4% dividend yield is nothing to shout about. Forecasts show it growing, though that’s far from guaranteed.

Overall, I’d judge Lloyds shares as about fair price right now. But with my long-term specs on, I’m considering topping up.

The post Is the car loan pressure on Lloyds shares really finally over? 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.