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Why the Lloyds Banking Group share price fell 7% in August

August was supposed to be a good month for Lloyds Banking Group (LSE: LLOY), with the harrowing PPI complaints saga finally drawing to a close.

Massive cost

The deadline for PPI complaints was 29 August, and that was a very important milestone as Lloyds has been hit for huge amounts of compensation. In fact, by the time of the bank’s interim results at 30 June, its total PPI provisions had amounted to a staggering £20bn.

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The final total has been a big unknown for Lloyds, and is turning out to be a lot more than many expected — and if there’s one thing the City’s institutional investors hate, it’s uncertainty.

Drawing a line under the PPI business will end that uncertainty and should allow Lloyds to get back to business as usual. But the sheer level of claims has held back any hope of short-term share price recovery. The second quarter alone saw a £550m addition to the cash set aside for PPI, as Lloyds admitted the volume of claims approaching the deadline had taken it by surprise.

Still falling

But why have Lloyds shares fallen 6.7% since 31 July? Firstly, to put it into perspective, the FTSE 100 has lost 5% over a bearish month for world stock markets. But as a Lloyds shareholder myself, I’m disappointed to see the shares falling further behind the Footsie — they’re down 16.9% over the past 12 months, while the index has lost only 4.1%.

The elephant in the room is Brexit. But not just Brexit alone, as we’ve known about that for more than three years now. The big problem is that, because Lloyds has refocused itself on its domestic retail banking business, it’s going to depend on the UK economy quit a bit more for its fortunes in the coming years.

A no-deal Brexit is likely to hit the UK economy a lot harder than a deal-based withdrawal, and the events of August have greatly increased the likelihood of the former. After Boris Johnson’s appointment as prime minister at the tail-end of July, his determination to get us out of the EU by 31 October, ‘deal or no deal’, means the chances of obtaining any exit deal are slipping away fast — as the Queen’s consent for his prorogue of parliament on Thursday made even clearer.

Worse to come?

In the coming months, I think Lloyds shares will probably fall even further, unless someone manages to thwart the PM’s single-minded determination. But does that mean Lloyds is overvalued now, or cheap and maybe set to become even cheaper?

I’ll tell you someone who thinks Lloyds shares are undervalued — Lloyds itself. As part of its buyback programme aimed at repurchasing up to £1.75bn of its own shares, Lloyds is snapping up around £10m of them every few days.

There are fears the dividend will have to be cut if Lloyd’s profits take a tumble. But launching a share buyback of that magnitude isn’t a step I’d expect a company to take if it’s concerned over its dividends. With yields forecast at around 7%, and on a forward P/E of under seven, Lloyds shares are still a buy for me, even if they might fall further in the short term.

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Alan Oscroft owns shares of 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.