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Lloyds Banking Group (LSE: LLOY) shares dipped sharply on Monday afternoon (17 February). They lost 4.3% in the space of just 15 minutes, but pulled back a bit to end the day down 2%. What’s happening?
It’s all about the car loan mis-selling thing, and Chancellor Rachel Reeves’ attempt to intervene. She previously wrote to the Supreme Court with a caution that any harsh outcome could damage the availability of loans. And she urged that “any remedy should be proportionate to the loss actually suffered by the consumer and avoid conferring a windfall.”
Court rejection
The news broke Monday that the court has rejected the government’s approach.
But what does this all mean for Lloyds and other banks? Lloyds isn’t the only one to fall in response to the news, as Close Brothers Group ended the day with an 8% slump. Close Brothers, a much smaller lender, could face serious problems if it’s hit with a big penalty.
The FTSE 250 company posted a modest £100m profit after tax for its last full year. And in a November trading update, Finance Director Mike Morgan spoke of “the significant uncertainty resulting from the FCA’s review of historical motor finance commission arrangements.”
Lloyds, with a profit after tax of £5.5bn last year, seems far more able to shrug off any fines without too much long-term harm. But it could still be painful, and could give long-suffering shareholders yet another kick.
What it means
What might come down on the heads of Lloyds and the others is still far from clear. Some, however, are suggesting total penalties across the sector of up to £30bn.
The Lloyds board has said precious little about the whole thing. With each quarterly update, the bank just keeps saying things like “no further charges in respect of the FCA review of historical motor finance commission arrangements.” That’s no change from the £450m provision announced with 2023 full-year results a year ago.
Management must surely share their current thoughts on the affair in FY24 results due Thursday (20 February). Mustn’t they? I won’t be alone in checking what they say the moment it’s released.
What should we do?
The choices facing shareholders and would-be investors remain the same. For me, it’s got nothing to do with any Treasury talk. Or any day-to-day speculations on the probe’s outcomes, or short-term ups and downs in share prices. No, it’s all about the actual outcome of the court process, with the case set for April. And I’m not sure even that will make much difference for me.
We’re looking at a projected price-to-earnings (P/E) ratio of 9.7 for the year just ended. We can confirm or not on Thursday. Forecasters expect earnings to dip in 2025 though, pushing the P/E to 11 before earnings growth gets it down to 7.5 by 2026. There’s an expected dividend yield of 4.6%.
Lloyds clearly faces retail banking risk in the next couple of years, and I see that as the real long-term key. At today’s valuation I think I’ll continue to hold my Lloyds shares, whatever the Supreme Court might decide.
I’ll wait for the results and for the court case to conclude before I decide whether to buy more.
