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The Lloyds Banking Group (LSE:LLOY) share worth had a very good day yesterday (8 October). By late afternoon, it was practically 3% greater after buyers reacted positively to the information that the Monetary Conduct Authority (FCA) was proposing an industry-funded redress scheme to attempt to put an finish to the controversy surrounding the alleged mis-selling of automobile finance. It’s hoped that this method will keep away from prolonged courtroom instances and pointless prices.
The FCA reckons lenders weren’t clear sufficient when disclosing the extent of fee paid to brokers. Of the 14.2m agreements entered into between April 2007 and November 2024, it believes 44% had been mis-sold. It’s proposing that buyers obtain a median compensation cost of £700. The general price to the {industry} may very well be £8.2bn. This estimate is predicated on 85% of these eligible lodging claims.
What are the implications?
It’s believed that Lloyds has a 20% share of the motor finance market. On this foundation, it might face a invoice of £1.6bn. That is greater than the £1.15bn provision it’s made in its accounts. Nevertheless it’s so much decrease than some earlier predictions made by others. For instance, Keefe, Bruyette & Woods, the funding financial institution, made a “conservative” prediction that the ultimate invoice may very well be as excessive as £4.2bn.
Lloyds says it’s “at present assessing the implications and impression of this session within the context of its present provision for this challenge and can replace the market as and when applicable”.
Regardless of the ultimate consequence of the FCA investigation, it was all the time more likely to be a drop within the ocean for the financial institution. At 30 June, its steadiness sheet disclosed belongings of £919.3bn together with money and money equivalents of £71.1bn.
However I nonetheless don’t need to make investments.
Warning indicators
Its share worth has been on a robust rally lately, which suggests the inventory has, for my part, turn out to be costly. Extra particularly, I imagine it’s pricy relative to the FTSE 100’s different banks.
Since October 2024, the Lloyds share worth has risen over 45%. Its inventory now trades at 12.7 instances historic earnings. NatWest Group is second with a price-to-earnings ratio of 8.9.
I’m additionally cautious of its virtually complete reliance on the UK financial system. Some key indicators are suggesting there may very well be hassle forward for the home financial system. There’s discuss that the Chancellor may impose some form of levy or windfall tax on home banks to try to assist shore up the nation’s funds.
Rachel Reeves might take inspiration from Poland, which has introduced a brand new three-year banking tax to assist fund elevated defence spending. In 2026, its banks pays a company earnings tax fee of 30% in comparison with 19% for many different giant firms.
A extra optimistic view
Nevertheless, brokers seem like extra optimistic than me. They’ve a median 12-month worth goal of 93p — that’s round 11% greater than immediately’s worth.
After which there’s the dividend that’s more likely to entice earnings buyers. Lloyds has already hiked its 2025 interim payout by 15%. If it raised its ultimate dividend by the same quantity, the inventory can be yielding 4.3%.
However this isn’t sufficient to tempt me. Despite the fact that I think the motor finance ‘scandal’ is more likely to be put to mattress over the approaching months, I feel higher worth may very well be obtained elsewhere.
