Has Lloyds (and its share price) had a lucky escape?
The Lloyds Banking Group (LSE:LLOY) share price had a good day yesterday (8 October). By late afternoon, it was nearly 3% higher after investors reacted positively to the news that the Financial Conduct Authority (FCA) was proposing an industry-funded redress scheme to try to put an end to the controversy surrounding the alleged mis-selling of car finance. Itâs hoped that this approach will avoid lengthy court cases and unnecessary costs.
The FCA reckons lenders were not transparent enough when disclosing the level of commission paid to brokers. Of the 14.2m agreements entered into between April 2007 and November 2024, it believes 44% were mis-sold. Itâs proposing that consumers receive an average compensation payment of £700. The overall cost to the industry could be £8.2bn. This estimate is based on 85% of those eligible lodging claims.
What are the implications?
It’s believed that Lloyds has a 20% share of the motor finance market. On this basis, it could face a bill of £1.6bn. This is more than the £1.15bn provision itâs made in its accounts. But itâs a lot lower than some previous predictions made by others. For example, Keefe, Bruyette & Woods, the investment bank, made a âconservativeâ prediction that the final bill could be as high as £4.2bn.
Lloyds says itâs âcurrently assessing the implications and impact of this consultation in the context of its current provision for this issue and will update the market as and when appropriateâ.
Whatever the final outcome of the FCA investigation, it was always likely to be a drop in the ocean for the bank. At 30 June, its balance sheet disclosed assets of £919.3bn including cash and cash equivalents of £71.1bn.
But I still donât want to invest.
Warning signs
Its share price has been on a strong rally recently, which means the stock has, in my opinion, become expensive. More specifically, I believe itâs pricy relative to the FTSE 100âs other banks.
Since October 2024, the Lloyds share price has risen over 45%. Its stock now trades at 12.7 times historical earnings. NatWest Group is second with a price-to-earnings ratio of 8.9.
Iâm also wary of its almost total reliance on the UK economy. Some key indicators are suggesting there could be trouble ahead for the domestic economy. Thereâs talk that the Chancellor might impose some sort of levy or windfall tax on domestic banks to try and help shore up the nationâs finances.
Rachel Reeves could take inspiration from Poland, which has announced a new three-year banking tax to help fund increased defence spending. In 2026, its banks will pay a corporate income tax rate of 30% compared to 19% for most other large companies.
A more positive view
However, brokers appear to be more optimistic than me. They have an average 12-month price target of 93p — thatâs around 11% higher than todayâs price.
And then thereâs the dividend thatâs likely to attract income investors. Lloyds has already hiked its 2025 interim payout by 15%. If it raised its final dividend by a similar amount, the stock would be yielding 4.3%.
But this isnât enough to tempt me. Even though I suspect the motor finance âscandalâ is likely to be put to bed over the coming months, I think better value could be obtained elsewhere.
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James Beard has no position in any of the shares mentioned. 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.
