On 20 February, when the bank’s scheduled to release its results for the year ended 31 December 2024 (FY24), I think the Lloyds Banking Group (LSE:LLOY) share price will come under the spotlight once again.
Yes, it’ll be interesting to see whether the banking giant’s performance has beaten analysts’ expectations. The average forecast of the 18 brokers covering the stock is for a post-tax profit of £4.64bn (FY23: £5.52bn). Following recent base rate cuts, they are expecting Lloyds’ net interest margin (NIM) to come under pressure. Their FY24 consensus is for a NIM of 2.95% (FY23: 3.11%).
Motor finance issues
However, I’m more interested in what the bank has to say about the ongoing review by the Financial Conduct Authority (FCA) into the possible mis-selling of car finance.
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In February 2024, the bank made a provision of £450m in its accounts to cover possible costs and compensation for customers.
Accounting standards require such an entry to be made when it’s “probable” that an outflow of economic resources will result. This tells me that Lloyds’ directors believe there’s likely to be some financial penalty. However, if latest estimates from Keefe, Bruyette & Woods (KBW) prove to be correct, it could be on the low side.
KBW has come up with a “conservative” prediction that the Black Horse bank could end up paying £4.2bn as a result of the ‘scandal’.
I think this is important because we’ve seen how sensitive the bank’s share price has been to the issue.
On 25 October 2024, its shares tumbled 7.3% when the Court of Appeal made a ruling that Lloyds said “sets a higher bar for the disclosure of and consent to the existence, nature, and quantum of any commission paid than had been understood to be required or applied across the motor finance industry prior to the decision”.
Conversely, on 21 January, the stock rose 4% when reports emerged that the government would seek to express its concerns to the Court that the case could undermine confidence in UK financial regulation. Since then, the share price has risen by a further 2.6%.
Timing is everything
The FCA investigation and unconnected legal cases have become a bit of a distraction.
It’s a shame because analysts are forecasting strong growth — they’re expecting a FY27 profit after tax of £6.04bn. If realised, earnings would be 30% higher than the FY24 consensus. These same ‘experts’ are predicting a 2027 dividend of 4.26p — an impressive yield of 6.8%.
Of course, much can happen over the next three years.
The bank derives nearly all of its income from the UK. And the domestic economy is proving to be fragile, which could affect earnings and its dividend. Any increase in loan defaults will affect its bottom line.
However, in my view, the most pressing issue is the FCA investigation. Don’t get me wrong, I believe the bank has the financial firepower to cope with a £4.2bn (or higher) cost. Any fines and compensation are likely to be paid over several years. At 30 September, its balance sheet shows cash of £59bn.
But in the short term, I suspect the share price will come under pressure if the provision’s increased. Therefore, if an investor was looking to buy Lloyds shares, I’d suggest they consider waiting for the results announcement before making a decision.
