The UK regulators have kick-started a redress program to compensate customers who were mis-sold car loans. As a result, Lloyds Banking Group (LSE:LLOY) believes it will have to set aside additional provisions to factor this in. Lloyds shares fell over 4% on the news today (9 October), but there are longer-term implications for investors to think about.
A quick refresher
Lloyds shares are up 48% over the past year, even though the motor finance investigation had been looming. Lloyds had already set aside significant provisions (over £1bn) to cover compensation and related costs. Therefore, the impact (both financially and from a reputational standpoint) could be argued to have already been taken into account by investors.
The move higher in the stock showed more focus was being put on elements such as earnings from net interest income, continued progress on modernising the bank, and other factors.
The short-term drop
The fall today highlights the need for Lloyds to raise its provisions for compensation beyond what it had already set aside. I expect this will reduce near-term earnings. As a result, it’s a normal reaction. The key piece to the puzzle is that the exact figure is unknown and might not be known for some time. Therefore, it’s hard to accurately say how much earnings will be impacted.
As a result, in coming days and weeks, I think the size of any potential drop relates more to the scandal raising questions about regulatory risk, legal liability, and the quality of underwriting processes at Lloyds.
Looking further ahead
Any stock can suffer from volatile movements day to day. Yet, as long-term investors, the idea is to look beyond the noise. The idea is to try to figure out if it’s a story that has implications for years to come.
From where we currently stand, I don’t see this impacting profitability in years to come. The hit will come as a provision on the accounts. But once the decision is finalised, Lloyds won’t keep having unexpected bills.
Further, Lloyds has mortgage, retail banking, insurance, wealth, and commercial lending operations. These losses in the motor finance area can be offset by growth and profitability in others. Even with the provisions for the scandal running above a billion pounds, it’s worth taking a wider perspective. The group had revenue of £37.77bn in 2024.
The main long-term risk I see relates to the regulator. Even after provisions, the scandal may lead to stricter regulation and more compliance costs. It could alter how Lloyds fundamentally does business. Although I see this risk as being small, it can’t be ruled out.
On balance, I struggle to see how the current motor finance situation results in a long-term negative for the stock. On that premise, I think that any further short-term dips could represent a buying opportunity for myself and could be worth considering for other investors.
