The Lloyds Banking Group (LSE:LLOY) share price has made a bumpy start to 2024. The stock has fallen by 8%, compared to a 1.5% decline for the FTSE 100.
Furthermore, news is emerging that the company could face a £1bn fine as the Financial Conduct Authority investigates practices around motor loan commissions. Should shareholders be worried?
Motor loans
Since 2021, certain types of commission structure for car loan providers have been banned. The concern was that it generated a conflict of interest between the broker and the borrower.
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But the FCA is also looking at cases from before 2021. If evidence of misconduct emerges, then customers could be due significant compensation.
According to analysts, Lloyds is one of the companies most heavily exposed to potential losses in this area. Barclays estimates that the cost could be between £500m and £1bn.
That goes some way towards explaining why the stock has been falling this week. But is this a buying opportunity or a sign of something more significant?
Context
To be clear: there’s never a good time to pick up a potential £1bn fine. But for Lloyds, the timing could be a lot worse.
The bank is coming off a strong year in terms of profitability last year. And on top of that, the firm reported in December that it had received almost £1.2bn to repay a loan it had virtually written off.
That left the company around £500m better off than expected. So while a potential charge for motor loan misconduct is unwelcome, the firm’s windfall can probably offset at least some of this.
The Barclays analysts also note that there’s a high degree of uncertainty at the moment as to how exposed any bank – including Lloyds – might be. I suspect that’s also weighing on the share price.
The core business
The current investigation is significant, but I think it’s important not to over-emphasise it. From an investment perspective, the company’s ability to make money over time will matter much more.
With inflation approaching the Bank of England’s target levels, interest rates are expected to come down this year. This is likely to weigh on margins across the banking sector, including Lloyds.
In 2023, the bank managed a 3% net interest margin – its highest level for a decade. This is set to fall to 2.94% this year, but that’s still higher than in any year from 2012-2022.
That’s why Lloyds is the top UK banking stock to buy right now, according to Morgan Stanley analysts. And I agree that the recent share price decline makes the stock look even more attractive.
A buying opportunity?
I think the Lloyds share price looked like decent value at the start of the year. In my view, the market is pricing in an interest rate cut that isn’t guaranteed to happen.
And while a potential £1bn fine is something investors should pay attention to, I think the long-term outlook is encouraging for the business and the stock. It’s on my buy list right now.
