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On 20 February, when the financial institution’s scheduled to launch its outcomes for the yr ended 31 December 2024 (FY24), I believe the Lloyds Banking Group (LSE:LLOY) share worth will come beneath the highlight as soon as once more.
Sure, it’ll be attention-grabbing to see whether or not the banking big’s efficiency has crushed analysts’ expectations. The common forecast of the 18 brokers overlaying the inventory is for a post-tax revenue of £4.64bn (FY23: £5.52bn). Following current base fee cuts, they’re anticipating Lloyds’ internet curiosity margin (NIM) to return beneath stress. Their FY24 consensus is for a NIM of two.95% (FY23: 3.11%).
Motor finance points
Nevertheless, I’m extra curious about what the financial institution has to say in regards to the ongoing evaluate by the Monetary Conduct Authority (FCA) into the doable mis-selling of automobile finance.
In February 2024, the financial institution made a provision of £450m in its accounts to cowl doable prices and compensation for patrons.
Accounting requirements require such an entry to be made when it’s “possible” that an outflow of financial sources will end result. This tells me that Lloyds’ administrators consider there’s prone to be some monetary penalty. Nevertheless, if newest estimates from Keefe, Bruyette & Woods (KBW) show to be appropriate, it could possibly be on the low facet.
KBW has provide you with a “conservative” prediction that the Black Horse financial institution may find yourself paying £4.2bn on account of the ‘scandal’.
I believe that is vital as a result of we’ve seen how delicate the financial institution’s share worth has been to the difficulty.
On 25 October 2024, its shares tumbled 7.3% when the Court docket of Attraction made a ruling that Lloyds mentioned “units a better bar for the disclosure of and consent to the existence, nature, and quantum of any fee paid than had been understood to be required or utilized throughout the motor finance trade previous to the choice”.
Conversely, on 21 January, the inventory rose 4% when experiences emerged that the federal government would search to precise its considerations to the Court docket that the case may undermine confidence in UK monetary regulation. Since then, the share worth has risen by an extra 2.6%.
Timing is the whole lot
The FCA investigation and unconnected authorized circumstances have change into a little bit of a distraction.
It’s a disgrace as a result of analysts are forecasting sturdy development — they’re anticipating a FY27 revenue after tax of £6.04bn. If realised, earnings can be 30% larger than the FY24 consensus. These identical ‘consultants’ are predicting a 2027 dividend of 4.26p — a powerful yield of 6.8%.
In fact, a lot can occur over the following three years.
The financial institution derives almost all of its revenue from the UK. And the home economic system is proving to be fragile, which may have an effect on earnings and its dividend. Any enhance in mortgage defaults will have an effect on its backside line.
Nevertheless, for my part, probably the most urgent difficulty is the FCA investigation. Don’t get me mistaken, I consider the financial institution has the monetary firepower to deal with a £4.2bn (or larger) price. Any fines and compensation are prone to be paid over a number of years. At 30 September, its stability sheet exhibits money of £59bn.
However within the quick time period, I think the share worth will come beneath stress if the availability’s elevated. Subsequently, if an investor was trying to purchase Lloyds shares, I’d recommend they think about ready for the outcomes announcement earlier than making a choice.
