An update on the investigation into mis-selling car finance has been buffeting the Lloyds Banking Group (LSE:LLOY) share price recently. But what’s coming next for the FTSE 100 bank?
Investors finally have some clarity around how much it might cost the company but there’s no time to be complacent. The next big uncertainty might be just around the corner.
Motor loans
Last week, reports emerged that the motor loan issue is set to cost the industry at least £8.2bn in direct redress. And the final total might be closer to £11bn.
That’s a lot, but it removes much of the uncertainty that’s been weighing on the stock recently. And the share price initially jumped on the news.
Lloyds had put aside £1.2bn to cover potential liabilities, but it looks like this might not be enough. That’s obviously not a good thing for shareholders.
As a result, the share price came back down to earth, ending the week roughly where it started. But I think there’s a bigger issue for investors to start paying attention to.
The Budget
The UK Budget is scheduled for 26 November and there’s a lot of uncertainty. It seems likely that the Chancellor is going to have to try and raise taxes in some way.
Exactly what way, however, is unclear. And there’s been speculation that the story might involve a windfall tax on banks – in the style of the one oil companies have been facing.
Earlier this year, the Chancellor’s Leeds Reforms set out plans to try and make UK banks more competitive by relaxing regulations. But this would be a move in the other direction.
For Lloyds – and its investors – that means one source of uncertainty is set to be replaced with another. And I expect that to weigh on the share price, at least for the next month or so.
Long-term thinking
A lot of the time, being a good investor is about taking advantage of uncertainty – it can weigh on share prices and create opportunities. But I’m not sure this is the case with Lloyds.
Banking is a cyclical industry, which means the time to consider buying is usually when things look tough. In this context, that’s when interest rates – and earnings – are low.
The stock is trading at a price-to-earnings (P/E) ratio of around 11. That’s not high relative to the wider FTSE 100, but it’s based on what I think might be cyclically high profits.
Having the largest base of UK consumer deposits is a big advantage in terms of underwriting loans. But I’m not convinced that’s enough to send the stock higher from here.
Final Foolish thoughts
The Lloyds share price has almost tripled in the last five years. Including dividends, investors who bought the stock in October 2020 have managed a return of more than 300%.
I’m not sure though, that right now is the time to be thinking about buying. The likely direction of interest rates makes me think there are better opportunities elsewhere.
