The Lloyds Banking Group (LSE:LLOY) share price has had quite the run over the last five years. The stock is up 147% and it still has a dividend yield of more than 4%.
Investors, however, should be at least a bit wary about the near future. The Supreme Court is set to rule on the ongoing motor loans investigation this month – and the effects could be huge.
Regulation
Since the start of 2024, Lloyds has been the subject of an ongoing investigation from the Financial Conduct Authority (FCA). The issue concerns commissions for selling car loans.
Before 2021, there was a conflict of interest between brokers and customers. Specifically, brokers were incentivised (via commissions) to sell loans with higher interest rates.
The issue is that this isn’t something customers were routinely aware of. As a result, they might have paid more for car loans than they needed to without realising it.
In October 2024, the Court of Appeal ruled in favour of consumers. In response, lenders have appealed to the Supreme Court in order to try and get the ruling overturned.
What next?
The consequences of the Supreme Court upholding the Court of Appeal’s decision are potentially huge. In the case of Lloyds, the firm has £1.2bn set aside to cover potential losses.
If the upcoming verdict goes the way of the lenders, the result could be a nice windfall for investors. If it goes the other way, there might be trouble ahead.
Analysts think the associated liabilities could be as high as £4.6bn if the Supreme Court rules in favour of consumers. That’s much more than Lloyds has in reserve.
Forecasting the outcome is extremely difficult, so investors need to ask themselves whether the current share price reflects the risk. And I think there’s reason to believe it doesn’t.
Valuation multiples
Right now, the Lloyds share price implies a price-to-book (P/B) multiple of one. That’s lower than NatWest (which has less exposure to motor loans) but it’s higher than Barclays.
Importantly, it’s also significantly higher than it was five years ago. And that makes me very wary when it comes to thinking about the stock from an investment perspective.
Source: TradingView
In this kind of situation, I typically look for the share price to reflect a worst-case scenario (or something approximating it). But I just don’t see how that can be the case at the moment.
At the current valuation, it looks to me as though the opposite is the case. And that makes me think the share price could fall sharply this month if the verdict goes against the lenders.
Risks and rewards
The Lloyds share price seems to have been largely unencumbered by the ongoing investigation over the last 18 months or so. And this could continue with a favourable verdict this month.
To my mind, though, the risk isn’t being adequately reflected in the current valuation. As I see it, the stock is unusually expensive at a time when the company is facing a significant risk.
I might come back to this one when things are a bit clearer. But I think there are better stocks to buy for my portfolio in July, so I’m focusing on those.
