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The Lloyds Banking Group (LSE:LLOY) share value had a superb day yesterday (8 October). By late afternoon, it was almost 3% greater after traders 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 strategy will keep away from prolonged court docket 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 fee of £700. The general value to the {industry} may very well be £8.2bn. This estimate relies 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 may face a invoice of £1.6bn. That is greater than the £1.15bn provision it’s made in its accounts. But it surely’s lots 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 situation and can replace the market as and when acceptable”.
Regardless of the remaining end result of the FCA investigation, it was at all times prone to be a drop within the ocean for the financial institution. At 30 June, its stability sheet disclosed property 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 value has been on a powerful rally not too long ago, which implies the inventory has, in my view, 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 value 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 nearly whole reliance on the UK economic system. Some key indicators are suggesting there may very well be hassle forward for the home economic system. There’s speak that the Chancellor would possibly impose some kind of levy or windfall tax on home banks to try to assist shore up the nation’s funds.
Rachel Reeves may take inspiration from Poland, which has introduced a brand new three-year banking tax to assist fund elevated defence spending. In 2026, its banks can pay a company revenue tax charge of 30% in comparison with 19% for many different massive firms.
A extra constructive view
Nonetheless, brokers seem like extra optimistic than me. They’ve a median 12-month value goal of 93p — that’s round 11% greater than immediately’s value.
After which there’s the dividend that’s prone to entice revenue traders. Lloyds has already hiked its 2025 interim payout by 15%. If it raised its remaining dividend by an identical quantity, the inventory can be yielding 4.3%.
However this isn’t sufficient to tempt me. Although I believe the motor finance ‘scandal’ is prone to be put to mattress over the approaching months, I believe higher worth may very well be obtained elsewhere.
