Since 23 October, the Lloyds Banking Group (LSE:LLOY) share price has fallen heavily. That was the day on which it reached its 52-week high of 64.67p. Today (29 November), I could buy a share for 53.28p — 17.6% less.
But should I?
What’s going on?
It’s not difficult to work out why the stock’s performance has lagged behind that of the FTSE 100, which has increased by 0.2% over the same period.
The shares moved sharply lower when the Court of Appeal ruled that it was unlawful for motor dealers to receive commission from lenders when providing finance, unless it was disclosed to customers.
This judgement is seen to widen the scope of an existing investigation by the Financial Conduct Authority (FCA), which is looking into allegations that dealers were encouraged to offer loans carrying higher rates of interest.
A similar market reaction occurred in July/August when two brokers increased their estimates of how much the misselling ‘scandal’ could end up costing the bank. However, these forecasts continue to rise.
RBC Capital Markets recently increased its prediction to £3.9bn.
Nothing to see here
But Lloyds doesn’t seem too concerned about the impact.
Accounting standards require a provision (estimate of likely costs) to be recorded when it’s “probable” that there’ll be an outflow of cash. In February, the bank booked a charge of £450m in its accounts but it hasn’t increased it since.
It recently told analysts — before the Court of Appeal ruling — that many legal cases are going in its favour.
And despite its woes, the bank’s share price remains comfortably above its 52-week low of 41p, recorded just before it announced details of the provision.
What should I do?
Previously, I had a position in Lloyds but sold up after its share price got stuck. I became increasingly frustrated as it was apparently unable to break through the 60p-barrier.
However, it remains one of the best dividend payers around. In respect of its 2024 financial year, it looks likely to return 3.18p a share. If correct, the stock’s presently yielding an impressive 6%, comfortably above the FTSE 100 average of 3.8%.
And in October, when the bank released its results for the nine months ended 30 September 2024, its financial performance beat analysts’ expectations. Revenue, costs, impairment charges, post-tax earnings and the return on tangible equity were all better than predicted.
However, there’s too much uncertainty surrounding the FCA investigation for my liking.
Personally, I don’t think the outcome is going to materially affect Lloyds. Even at the upper end of expectations, a total cost of £3.9bn is a drop in the ocean for a bank with over £900bn of assets — including £59bn of cash — on its balance sheet (30 September).
But it’s clear from recent share price movements that investors don’t like the uncertainty. And I think it’s inevitable that Lloyds will soon have to increase its existing provision. I think there could be a significant drop in its share price when this happens.
Even though I’m a long-term investor, there’s little point buying a stock if it’s likely there’s going to be a period of price volatility.
For this reason, I’m going to wait for this to happen and then consider taking a position.
