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Lloyds shares: why I think investors could be in for a bumpy ride

2019 has been a rollercoaster ride for Lloyds Bank (LSE: LLOY) shareholders so far. Starting the year at 52p, Lloyds’ share price surged nearly 30% in the first few months of the year to hit 67p by mid-April, but since then, the shares have underperformed and fallen back to 50p.

Looking ahead, I think there could be plenty more turbulence on the horizon for Lloyds shareholders, unfortunately. Here’s why.

Risks

Back in late July, I penned an article that looked at four key risks that Lloyds faced. These included the UK economy/Brexit, interest rates, payment protection insurance (PPI) claims, and FinTech. Today, these risks are all still highly relevant.

However one in particular concerns me a lot and that’s PPI claims. With the PPI deadline (29 August) just days away now, and many people scrambling to complete a last-minute claim, I think there’s a chance PPI claims could hit Lloyds’ near-term profits significantly.

Last-minute PPI claims

In the bank’s most recent half-year results that were released at the end of July, Lloyds announced that it had set aside another £550m to pay for PPI claims. That figure was worse than City analysts were expecting. 

However, what worries me is that research from the Financial Conduct Authority (FCA) released last week showed that nearly one in five people were still deliberating over making a claim and that around half of these people were “confident” that they would complain ahead of the deadline.

The FCA’s research – which has been released by the regulator in an effort to encourage people to act as soon as possible – also revealed that in the past eight weeks, since its final PPI push went live, there has been a 420% increase in online activity associated with PPI claims, compared to the previous eight weeks.

These findings suggest to me that Lloyds could be set to face a large number of claims in the lead-up to the deadline. What impact this will have on second-half profits is impossible to know right now, but I think it could be substantial.

Add in all the risks associated with Brexit and the near-term outlook for Lloyds certainly looks challenging. For shareholders, the next six months could be turbulent period.

What I’d do

That said, at a share price of 50p, you have to wonder how much of this risk is baked into the investment case right now. Analysts currently expect Lloyds to generate earnings per share of 7.6p this year, which puts Lloyds shares on a forward-looking P/E ratio of just 6.6 – a little over half the median forward-looking P/E ratio of all FTSE 100 companies. That’s certainly not a demanding valuation. And assuming the bank doesn’t need to slash its dividend payout as a result of PPI claims, there’s also a big yield on offer for investors.

Given this rock-bottom valuation and big dividend yield, I see Lloyds as a ‘hold’ at the moment. While the near-term future looks challenging, I’ll be holding on to my shares and focusing on the long term. 

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Edward Sheldon owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.