Loan pressure passes: now can the Lloyds share price tip £1?

The Lloyds (LSE:LLOY) share price is trading at 10-year highs. Essentially, it hasn’t been higher since the Brexit referendum. Britain voted to leave, the pandemic happened, and then there was the uneasy rise in inflation and interest rates. None of that was good for the share price.

The bad times, however, have largely passed. Moreover, the recent pressure created by the mis-selling of car finance may soon ease following the Financial Conduct Authority’s announcement of a formal redress scheme — the largest since the PPI scandal.

Of the 32m car finance agreements during the investigated period, around 14m are thought to have been mis-sold, with an average payout of about £700 per case. 

Experts have described the process as the “simplest” redress mechanism the FCA has ever implemented. It should allow banks like Lloyds to resolve legacy issues efficiently and restore further confidence among investors.

In short, the saga isn’t totally over, but the end is in sight. This could unleash the share price.

Valuation suggests caution

The only problem is… Lloyds shares actually aren’t that cheap right now. The stock is trading at 11.9 times forward earnings, and that’s a premium to most of its peers in the UK banking sector.

However, this premium valuation can be attributed to an above-average estimates of the bank’s earnings growth rate in the coming years. The stock is trading at 7.5 times forecast earnings for 2027. That brings it closer in line with peers.

In the near term, at least, this suggests to me that the stock won’t going surging to £1 a share — a figure not seen in over 15 years. Even when accounting for the nearly 4% dividend yield, there’s not enough to make me think the stock will push to £1 this year.

However, if the expected earnings growth continues beyond the current forecasting period, then absolutely, I’d expect to see the stock hit £1 per share… maybe as soon as next year.

The bottom line

The forecast is very much key to where the share price goes next. We don’t buy shares in a company because of how it has performed, but because of how we think it will perform in the future.

The outlook for Lloyds remains strong, driven by a steady easing in interest rates and disciplined hedging practices that continue to underpin solid net interest income.

However, this is a bank that is only operational in the UK, and let’s face it, things aren’t looking that great. The government is losing control of the country’s finances and the autumn Budget may hold a few surprises for individuals and businesses.

Personally, I think Lloyds is absolutely worth considering. However, I believe we’re going to see slow and steady growth over the next few years. It’s up 205% over the past five years — but I don’t think that’s going to happen again.

The post Loan pressure passes: now can the Lloyds share price tip £1? appeared first on The Motley Fool UK.

More reading

• Lloyds share price: what the latest results, buybacks, and motor-finance redress mean for investors
• Has Lloyds (and its share price) had a lucky escape?
• Here’s how the motor finance scandal could impact Lloyds shares long term
• Lloyds shares drop on car loan news! Is this a dip-buying opportunity?
• Is the car loan pressure on Lloyds shares really finally over?

James Fox 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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