The Lloyds Banking Group (LSE: LLOY) share price has climbed 44% in 2025, year-to-date. So far, investors seem to have shaken off the threat raised by the ongoing investigation into car loans. The bank was allegedly paying hidden commissions to brokers, leading to potentially higher interest rates for customers.
We’re currently awaiting the judgment of the Supreme Court, after the Court of Appeal ruled in favour of consumers in October 2024. The ruling’s expected this month, and it’s somewhat overshadowing Lloyds’ first-half results due Thursday (24 July).
The first half
Apart from the car loan threat, the outlook for Lloyds’ first half looks pretty decent. At Q1 time, CEO Charlie Nunn told us that “net income continues to grow, following the upward trajectory established in the second half of last year.” He added that “asset quality remains resilient.”
Underlying net interest income in the quarter reached £3.3bn, up 3% from the same period last year. We’d expect that to be hampered by falling Bank of England interest rates. But a surprise inflation jump to 3.6% for the year to June has probably dampened hopes of any accelerating schedule on that front.
Full-year outlook
Analysts put the Lloyds price-to-earnings (P/E) ratio at around 11.5 for the full year. With the economy still uncertain and trade wars rattling the globe, I think it’s probably about right. I’m happy to hold at that valuation and keep taking the dividends — currently with a 4.1% forward yield.
Forecasts suggest strong earnings growth for the next two years. And if the upcoming interim results show signs supporting that outlook, I’d expect the Lloyds share price to react positively — in the absence of other threats.
That brings me back to the car loan thing. And I have to ask whether markets are giving the possible outcomes sufficient consideration. Is there enough safety margin in today’s valuation?
Enough safety?
If the Supreme Court returns a verdict in line with the most pessimistic suggestions, then no, I really don’t see enough there. Lloyds has £1.15bn set aside at the moment. And if that’s enough, all should be fine. But some analysts think that if the Court comes down hard in favour of consumers, the liabilities could reach as much as £4.6bn. I reckon that could leave Lloyds’ balance sheet wanting, and we could see a sharp share price dip.
To sum up, I see Lloyds as really being back to long-term health after so many scares over the past couple of decades. But I fear this current hurdle could trip it up in the short term. As a long-term investor, I’m not going to sell now. But if I didn’t own any, I’d hold off considering a purchase until this case is resolved.
Alternatives?
What should investors bullish about banks but wary of Lloyds do? One option might be to consider NatWest Group instead. A forward P/E of just 8.7 and a 4.2% dividend yield could be attractive — and it’s not involved in the car loan battle. First-half results are due Friday (25 July).
