Picture supply: Getty Photos
Shares in Lloyds Banking Group (LSE: LLOY) closed down 7% on Friday. The inventory’s down an additional 2% as I write on Monday (28 October). That’s a fall of 9% in two buying and selling days – fairly a giant drop for a FTSE 100 inventory.
The financial institution’s share worth droop was triggered by information of a Court docket of Attraction ruling that would doubtlessly result in larger compensation prices for the motor finance trade.
Why this issues
Lloyds’ Black Horse subsidiary is the UK’s largest automotive finance supplier, with round a 3rd of the market. And it’s one in all a number of UK companies presently concerned in an investigation by the Monetary Conduct Authority (FCA) into historic motor finance fee funds.
Briefly, the FCA’s reviewing whether or not fee funds made by finance suppliers to used automotive sellers weren’t appropriately disclosed to automotive patrons. Friday’s information associated to a case involving Shut Brothers Group, one other large UK motor finance supplier.
The case associated to a single grievance. However the concern amongst lenders is that the FCA could use this ruling to take a stricter strategy on compensation than beforehand anticipated. This might result in a lot larger compensation prices for all affected lenders.
Lloyds has already put aside £450m to cowl compensation. However in an announcement this morning, the financial institution mentioned the ruling “set a higher bar for disclosure” than “had been understood … prior to the decision”.
Because of this, Lloyds says it’s now “assessing the potential impact of the decisions”.
What occurs now?
Shut Brothers has mentioned it intends to enchantment final week’s resolution to the UK Supreme Court docket. It would but be reversed.
Lloyds has round £15bn of motor finance loans, giving it round a 3rd of the UK market. Whereas this can be a large quantity, it’s solely a small a part of the group’s general mortgage ebook of round £450bn – largely residence mortgages.
I’m assured Lloyds can deal with any doable compensation payouts that may grow to be crucial. However the query for potential traders – together with me – is how the price of this may have an effect on shareholder returns.
Is that this one other PPI?
Skilled traders could bear in mind the PPI scandal. The massive UK banks had been pressured to pay out greater than £50bn in compensation for mis-sold fee safety insurance coverage. Lloyds was the largest payer, shelling out greater than £20bn in compensation.
Some Metropolis analysts consider the FCA’s motor finance probe could possibly be the subsequent PPI. Estimates reported within the Monetary Occasions from main brokers have pegged the potential complete price for motor finance lenders at between £6bn and £16bn.
Purchase Lloyds at underneath 60p?
Nothing’s sure but. The FCA isn’t anticipated to offer one other replace on its progress till Might 2025.
For now, Lloyds’ current third-quarter replace suggests present buying and selling’s strong sufficient. The forecast dividend yield of 5.6% seems to be secure to me, accurately coated twice by 2024 earnings.
The chance, for my part, is that the motor finance evaluation might result in a multi-year drag on profitability and shareholder returns. That’s what occurred with PPI.
I desire to keep away from this type of regulatory threat, so I’d look elsewhere if I used to be shopping for a banking inventory at this time.
