At the end of October, the Lloyds (LSE:LLOY) share price took a massive tumble by almost 15% in just a few days. This downward volatility came in after a pretty unfavourable court ruling that might land Britain’s third-largest bank with a chunky fine next year.
Yet there are other bearish forces at work that could place this business under even more pressure, potentially even sending stock prices plummeting in the wrong direction.
The challenges it’s facing
Let’s start with the most threatening problem – undisclosed motor finance commissions. In October, the UK Court of Appeal ruled that motor finance lenders who paid commissions to car dealers without informing the end customer was unlawful.
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Lloyds’ Black Horse brand (Britain’s largest motor financing provider) is now at the centre of a financial scandal. Analysts from Moody’s have estimated that total cost across the entire finance lending sector could be as high as £30bn. Yet Stephen Braviner Roman – the FCA’s executive director of legal affairs – has said the scale of this misconduct could translate into a compensation bill as large as PPI (around £50bn).
Adding fuel to the fire, Lloyds’ earnings momentum might also be set to slow for a completely different reason next year. After the financial markets enjoyed a significant rebound this year, bearish investors like Jeremy Grantham are predicting a new stock market crash could emerge in 2025, citing a market bubble surrounding artificial intelligence (AI) companies.
That’s bad news for Lloyds’ investing division, which has played a large role in propping up net profits now that interest rates are steadily falling.
Needless to say, these incoming headwinds are a significant threat. And they may even be sufficient to trigger a crash in the Lloyds share price. So what should investors do now?
Don’t panic
Let’s start by addressing the calls for a stock market crash. Grantham isn’t the only bearish investor expecting a sharp correction in stock prices. But it’s worth pointing out that such predictions aren’t anything new. In fact, there are calls for another stock market crash almost every year. And so far, the vast majority have been completely wrong, resulting in those who listened missing out on terrific gains.
However, the concerns surrounding motor financing are definitely more worrying. But this story is far from over. Earlier this month, the UK Supreme Court granted permission for lenders to challenge the Court of Appeal’s ruling, with the case being heard throughout the first four months of 2025. If the judgement’s overturned, this scandal could disappear very quickly.
Overall, there’s a lot of uncertainty surrounding this business. And uncertainty rarely sits well with investors. So I wouldn’t be surprised to see Lloyds’ valuation stagnate until the outcome of the Supreme Court hearing’s known. Depending on the court’s ruling, Lloyds shares could move up or down sharply in the short term.
But in the long run, Lloyds is unlikely to disappear. After all, its operations are vast, with motor financing being only a small part of its business. All things considered though, I’m not rushing to buy any shares.
