Lloyds (LSE:LLOY) shares are some of the most popular on the entire London Stock Exchange. And in recent months, they’ve proven to be strong performers. In fact, the entire banking sector seems to be on fire right now. Falling interest rates put pressure on lending margins, but they also help boost the financial markets that Lloyds and others have been successfully capitalising on.
So, if someone invested £5,000 in early 2023, how much money could they have made with one of Britain’s largest banks? And should I buy it today?
Reaching multi-year highs
The rebound in Lloyds shares throughout 2024 has helped the bank recover some of the ground it lost courtesy of the pandemic. And earlier this year, the stock price even topped the 60p threshold for the first time since 2019.
It wasn’t a perfectly smooth journey though. New shareholders in early 2023 had to endure a few months of downward momentum before conditions and sentiment improved. Nevertheless, even with this initially weak performance, the shares are still around 10% higher today versus January 2023. And when including the extra gains delivered through dividends, shareholders have reaped a total return closer to 23%.
That means a £5,000 investment in Lloyds shares back in January 2023 is now worth around £6,150. And compared to the 14% gain achieved by the FTSE 100 over the same period, shareholders are currently beating the UK stock market. As economic conditions improve, Lloyds may continue reaping higher returns from its investment division, driving up the share price even higher in 2025 and beyond.
So, is this a terrific stock for me to buy now? Maybe. But there’s a big elephant in the room that needs addressing.
A £3.9bn incoming penalty?
Despite strong performance from Lloyds shares, the returns pale in comparison to other banks over the same period, such as Natwest (+46%) and Barclays (+65%). There are a few factors at play here. However, the most significant concern is the ongoing FCA investigation into undisclosed commissions for motor financing loans issued prior to 28 January 2021.
No verdict has so far been forthcoming. But Lloyds is fairly exposed. After all, it’s one of the largest motor financing issuers in the UK, with around £15bn in loans currently on its books.
Management has already put aside £450m to cover any potential regulatory penalties. However, some analysts think the cost could be considerably greater. For example, RBC Capital has estimated that in the worst-case scenario, Lloyds may have to cough up anywhere between £2.5bn and £3.9bn.
With the expectation of disaster already being baked in, it’s not surprising that Lloyds shares have underperformed versus its peers. And this threat is why I’m personally not tempted to start adding any of the shares to my portfolio. However, should the penalty be far smaller than expected, the stock could rally as confidence returns. I may look at it again at that point.
