Lloyds (LSE:LLOY) shares have been up and down like the proverbial see-saw in recent days. They’re currently down more than 2% on Thursday (9 October) after disappointing news on the car finance mis-selling saga.
It’s a different story to yesterday, when Lloyds’ share price spiked after the Financial Conduct Authority (FCA) indicated customer payouts would be smaller an anticipated. The FTSE 100 bank closed at fresh multi-year highs of 84.36p per share on the news.
So what’s spooked investors today? And should stock pickers consider picking up the bank following its fresh drop?
Good news
Fears of another expensive misconduct scandal have stalked lenders in 2025. In an unwelcome reminder of the multi-billion-pound PPI scandal, banks faced allegations that secret commission payments to car dealers were unlawful.
Developments in recent months have seen Lloyds and its shareholders breathe a sigh of relief. In August, the Supreme Court revealed such arrangements were in fact legal. This closed off the possibility of thumping industry-wide compensation that some analysts suggested could reach £50bn.
Lenders were still open to large penalties under an FCA investigation into whether the practices were still unfair. But this scenario also seems to have been avoided, according to a statement by the regulator yesterday.
It said claimants would receive on average £700 each in compensation. That’s below the £950 that was previously forecast for 14m credit arrangements, and would result in a total bill of £8.2bn, at the bottom end of estimates.
So why has Lloyds sunk?
Following yesterday’s announcement, Lloyds said it was “assessing the implications and impact of this consultation in the context of its current provision for this issue.” But investors hoping for a good result sent its shares sharply higher.
It appears they were jumping the gun, as on Thursday the bank said while “uncertainties remain outstanding on the interpretation and implementation of the proposals,” it added that “an additional provision is likely to be required which may be material.”
Lloyds has already set aside £1.2bn to cover potential costs.
The news adds another layer of uncertainty investors need to digest. For me, it’s a development that makes buying and holding Lloyds shares an even more unappealing prospect.
Big risks
Lloyds’ share price has soared 53% in the year to date. It’s a rise I think fails to reflect a multitude of dangers the bank faces, and in my opinion leaves it vulnerable to a potential correction.
Impairments are rising, and could continue heading northwards as the UK economy struggles and inflation increases. The revenues outlook is also thanks to these pressures and growing competition across its product lines.
Speculation also abounds than the bank could be hit by an industry-wide windfall tax announced in November’s Budget.
On the plus side, Lloyds’ unrivalled brand power in essential retail banking services could protect earnings. So could the possibility of fewer-than-expected Bank of England interest rate cuts that boost banks’ margins. But then the latter scenario also creates significant risks, as higher interest rates could weigh heavily on mortgages demand, a critical segment for Lloyds.
Lloyds’ share price currently has a forward price-to-earnings (P/E) ratio of 12.2 times, the highest among the FTSE 100’s banks. Given the risks I’ve described, I think investors should consider avoiding the shares today.
