The Lloyds (LSE: LLOY) share price has climbed 5% this week following a key legal victory in the UK Supreme Court. The ruling, handed down last Friday (1 August), found that lenders like Lloyds weren’t liable for brokers who earned higher commissions by charging customers inflated interest rates — a practice that did not constitute bribery, according to the court.
It’s a major win for the banking giant and, at least temporarily, removes a legal cloud that’s been hanging over the stock. That said, it’s not quite case closed. The Financial Conduct Authority (FCA) has since said it plans to consult on a potential compensation scheme for borrowers it believes were treated unfairly.
Lloyds previously set aside £1.2bn to cover any such claims and that provision remains in place for now. The bank said it will “keep its provision for motor finance claims under review” in light of the court’s decision.
Brokers are bullish
The ruling has had a ripple effect across the analyst community. Brokerage RBC upgraded Lloyds from Sector Perform to Outperform, citing reduced legal risks. Meanwhile, Goldman Sachs went one step further, shifting from a Neutral stance to a full-on Buy, while hiking its target from 87p to 99p.
That’s a sizeable jump considering the stock trades at just under 82p, as I write. And given the long-standing pressure the case has put on investor sentiment, the recent bump may just be the start of a broader re-rating.
However, it’s worth noting that both Citi and JP Morgan maintain a Neutral rating on the stock.
Financial snapshot
Still, it’s also significant that Lloyds shares have underperformed compared to rivals. Over the past year, they’ve climbed a respectable 53%. But Barclays is up over 80%, and NatWest has gained 66%.
Valuation-wise, Lloyds also appears slightly more expensive than the others. Its forward price-to-earnings (P/E) ratio is 10.7, compared to just 8.8 for both Barclays and NatWest.
However, the big draw for long-term investors remains the dividend. With 11 consecutive years of payments and four years of uninterrupted growth, it’s become a core income stock for many UK portfolios. The 4% yield’s decent, and with a payout ratio of 50%, it looks well-covered by earnings.
Looking ahead
While this week’s gains are welcome news, there’s a chance that the market has already priced in the court victory. That could limit short-term growth potential unless we see another catalyst. And if the FCA finds grounds for compensation, the bank’s reputation may take another hit, shaking investor confidence.
There’s also the broader issue of economic uncertainty. Lloyds is heavily exposed to the UK consumer, so any downturn in lending demand or uptick in defaults could hit earnings.
Still, with legal uncertainty reduced and brokers now more bullish, Lloyds is back on the radar. The valuation isn’t screamingly cheap, but with reliable dividends and a strong retail banking base, this remains a solid contender to consider for anyone building a diversified, long-term portfolio.
It may not be the fastest horse in the race, but it’s one that could go the distance.
