On 22 February, the Lloyds (LSE:LLOY) share price closed 6.3% higher following the release of the bank’s results for the year ended 31 December 2023 (FY23).
I’ve been taking a closer look at the numbers to see what might happen next to the share price.
A good year
Lloyds profit after tax was £5.518bn, which beat the company-compiled consensus forecast of analysts, by £129m.
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There was plenty of speculation before results day as to the size of the provision that the bank might make to cover potential compensation and costs, as a result of the Financial Conduct Authority’s (FCA) investigation into the mis-selling of car finance. It’s seeking to establish whether buyers were unfairly charged more due to secret commission arrangements with dealers.
Under accounting standards, a provision is required if a payment is “more likely than not” and can be “estimated reliably”. The fact that Lloyds has set aside £450m implies it has a case to answer.
The size of the estimate is important because if it had provided another £130m, it would have performed worse than forecast.
And presumably, its shares wouldn’t have increased by over 6% when it announced its results.
A wide range of estimates
At this stage, nobody knows what the final cost will be for the financial services industry. Estimates range from £9bn to £16bn.
Through its Black Horse division, Lloyds is believed to have a 20% market share. The potential cost to the bank could therefore be £1.8bn-£3.2bn.
But after watching ITV’s Martin Lewis Money Show Live on 20 February, I’m convinced that many more claimants will be coming forward.
The self-styled ‘money saving expert’, who was once described by The Guardian as “the most trusted man in Britain”, was urging viewers to contact the FCA.
I wouldn’t be surprised if the final bill for Lloyds exceeded even the most pessimistic forecast.
Impact on the share price
I think this uncertainty will act as a drag on the bank’s share price. The FCA isn’t expected to report its findings until September.
As a shareholder, I find this disappointing because there are many reasons why, I believe, the bank is undervalued.
Its price-to-earnings ratio is currently 5.3. Post-pandemic it was seven. Applying the higher figure to its FY23 profit would give a market cap of £38.6bn, and a share price of 60.75p – a 31% increase on today’s value.
Based on its balance sheet at 31 December 2023, its price-to-book ratio is 0.62. This means if the bank closed down, it could return 74p per share to shareholders. That’s a 60% premium to the current share price.
Lloyds also pays generous dividends – its stock is currently yielding 6%.
But I think it’s fair to say that banking shares are unloved at the moment. It’s almost as if investors are looking for reasons not to invest. And the ongoing mis-selling investigation is one such reason.
Also, Lloyds generates nearly all its income in the UK. This means its fortunes are heavily dependent upon the performance of the domestic economy. Although GDP is expected to grow again soon, economists expect the rate of growth to be sluggish for some time.
I therefore can’t see the share price moving much higher until the UK economic outlook improves.
And most importantly, the FCA concludes its investigation.
