Those with a vested interest in the Lloyds (LSE:LLOY) share price have had a miserable week.
At close of business on 24 October, the bank’s shares were changing hands for 62.2p. Today (1 November), I could buy one for 53.7p. Although a fall of 13.7% in such a short period of time isn’t unprecedented, it’s certainly unusual for a FTSE 100 stock.
It’s particularly disappointing for shareholders given that the bank’s Q3 2024 results, released on 23 October, were positively received by investors. Revenue, profit after tax, and its net interest margin were all better than analysts were expecting.
However, the ongoing investigation by the Financial Conduct Authority (FCA) into the alleged misselling of car finance is weighing heavily on the bank’s share price.
Dodgy dealers
The FCA has been looking into claims that there’s been a lack of transparency surrounding the commission paid to motor dealers by finance companies. Black Horse, a subsidiary of Lloyds, is believed to have a 20% market share and could be liable for large compensation payments.
Reminiscent of the misselling of payment protection insurance (PPI) — which is believed to have cost the industry nearly £50bn — investors appear nervous about the potential impact.
But until recently, Lloyds’ directors didn’t appear to be too concerned. At 31 December 2023, the bank made a provision of ‘only’ £450m in its accounts to cover the possible cost.
However, there was an unexpected development on 25 October, when the Court of Appeal made a ruling which Lloyds claims sets a “higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision”.
The bank’s shares fell 7.3% that day.
Things could have been worse. The share price of Close Brothers Group — another with a 20% share of the market — closed 24.5% lower.
Opportunity
But short-term volatility in a company’s stock price can be a good opportunity for long-term investors, like me.
I could now buy shares in Lloyds at a 16.9% discount to their 52-week high. The bank’s now valued at 8.5 times its expected 2024 earnings.
And it’s yielding an impressive 5.8%.
However, I don’t want to buy.
Justification
Some of my reluctance is due to my existing shareholding in Barclays. I don’t want two UK banking stocks in my portfolio.
But I’m also concerned that the sector appears to be out of favour with investors.
According to Goldman Sachs, Europe’s banks trade on an earnings multiple of 6.5, which is close to a 20-year low.
On this basis, it could be argued that despite the recent pullback in its share price, Lloyds is actually overvalued.
Also, with the bank deriving nearly all of its earnings in the UK, its performance is closely linked to the fortunes of the domestic economy.
But the ‘pro-growth’ Budget on 30 October did little to improve the medium-term prospects of Britain’s economy. In fact, the latest 2027 GDP growth forecast, prepared by the Office for Budget Responsibility, is now lower than before the Chancellor delivered her speech.
For these reasons, I don’t want to take a position.
