Despite falling 15% from their highs, Lloyds Banking Group (LSE:LLOY) shares are up 50% in the last 12 months. And there’s a good reason why.
A year ago, US foreign policy was creating stock market volatility. Does that sound familiar at all?
Then and now
So this time last year, investors were focused on tariffs. The question was whether these were a negotiating move or a long-term policy.
The answer turned out to be something of a mix. But it caused share prices to fluctuate while events unfolded (and still do, to some extent). But as a UK-focused bank, Lloyds was somewhat insulated from this. The stock however, fell as much as 11% during the volatility.
Right now, investors are more interested in the conflict in the Middle East. Again, how long this is supposed to last is unclear. The effect on Lloyds – once again – is indirect (coming via inflation and interest rates). But the implications are real and the stock’s down as a result.
Bouncing back?
Based on this, investors might see the recent decline as a buying opportunity. And they could be right, but a couple of things are worth noting. One is that Lloyds isn’t the firm that stands to benefit most from a quick resolution to the conflict. Several other companies have more at stake.
Another is that some much bigger risks are still ongoing. Most notably, the company’s ongoing motor loans issue has been progressing. The scheme for loans taken out between April 2014 and November 2024 begins in July. And the scheme for earlier loans begins in September.
Exactly how much the bank will have to pay out is still unclear. But I think this is a much bigger issue for investors right now.
Room for optimism?
Lloyds has reserved £1.95bn to cover costs. That’s well below the £4.6bn some analysts had suggested, but the bank has had some good news. Some loans are excluded and other payouts are capped. Most importantly, the Supreme Court ruled that broker commissions didn’t constitute bribes.
Both of these are positive. But there’s still a big point of uncertainty for investors, which is what the take-up rate from customers will be.
Lloyds is anticipating around 75%. If that turns out to be too low, the bank might find itself paying out more than it anticipated. That’s a major risk for investors. And it’s unlikely to be resolved by the end of 2027, which makes buying the stock right now risky.
What to do?
Despite everything, £10,000 invested in Lloyds’ shares a year ago is now worth £15,068. And that isn’t including £512 in cash dividends.
It’s hard to argue with that result. But a lot of this is because certain risks haven’t gone as badly as they might have. There’s still plenty of uncertainty. That’s true of both Lloyds specifically and the stock market more generally.
The outcome of the motor loan issue is difficult to assess accurately. And Lloyds isn’t the company with the most to gain from a Middle East resolution. As a result, I think there are more obvious opportunities elsewhere. So that’s where I’m focusing my investing at the moment.
