Last week brought a flurry of old subjects back to fore within the banking sector, prompting yet more losses for shareholders and forcing the UK government to abandon plans for an already-belated exit from its position in Lloyds Banking Group (LSE: LLOY).
It’s with this and the current low level of the share price in mind that investors may now be wondering whether or not they should pile-in, or increase their existing positions.
If you’re one such investor, then here are a few points to consider before making any final decisions.
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Implications of a PPI deadline
One of the events to have spooked investors in the banking sector during the last week was news that regulators are close to deciding whether and when to implement a deadline for PPI claims.
There are both pros and cons to any resulting cut-off date. Yes it will provide a certain end to an issue where there has been no certainty for a number of years. On the other hand, it could lead to a deluge of new claims for Lloyds to deal with.
Any such flood could have a considerable impact on earnings this year and next.
PPI 2.0: The Plevin Case
In addition to concerns over costs of the current PPI saga, investors also have the implications of the Plevin case to consider.
This issue came back to the fore last week with analysts at Autonomous Research having released a report that puts its potential cost to the industry at just over £30bn.
In the Plevin Case, the Supreme Court ruled that non-disclosure of commission payments to intermediaries (middlemen) and the non-disclosure of the recipient’s identities did, and would with other cases, constitute a breach of the Consumer Credit Act 1974.
This now sets a precedent that could eventually open up a very costly can of worms for the banking sector.
As one of the most prolific pushers of PPI, LLoyds would be heavily exposed to any new spate of litigation related to the issue.
Balance sheet, dividend & valuation
Lloyds currently trades at 1.2 times tangible net assets per share and roughly 8.5 times the consensus estimate for earnings per share in the current year.
On a price-to-earnings basis, Lloyds is valued at par with its peer group. However, using the net assets approach to valuation the group stands out as considerably more expensive than HSBC (0.66 times), Standard Chartered (0.55 times), Barclays (0.65 times) and Royal Bank of Scotland (0.69 times).
The current consensus also suggests that Lloyds will pay 2.21p per share in dividends for the 2015/16 year, which would provide shareholders with a yield of 3.5% at current prices.
Such a payout would be more than is available at the likes of Standard Chartered, while being in line with that of Barclays and less than that at HSBC.
Summing up
Even after their fall from grace in 2015, Lloyds shares still trade at a premium to the sector, while not necessarily offering any more than their peers in return.
This premium remains despite Lloyds being the most exposed to risks coming from the Plevin case, as well as the regulator’s PPI deadline.
So it seems to me that there’s probably better value elsewhere for investors who don’t already own Lloyds shares. For those who already do, it seems that a long wait could be in order.
