The Lloyds Banking Group (LSE: LLOY) share price has been driven largely by the car loan mis-selling probe in recent weeks. It rose after chancellor Rachel Reeves urged leniency from the Supreme Court in its forthcoming case. And it fell again when the court rejected the government’s overtures.
And now Lloyds’ shares have moved up a few percent on full-year results morning (20 February) despite a 20% plunge in profits. News of a new £1.7bn share buyback was something of a sweetener. But what did the bank say about the mis-selling?
Mis-selling provisions
Previously, Lloyds had set aside a provision of £450m “for the potential impact of the FCA review into historical motor finance commission arrangements and sales“. In the fourth quarter, it’s added a further £700m to that for a total of £1.15bn.
Against a background of claims that the total cost to lenders could be as high a £30bn, will that be enough? I have no idea, and it seems Lloyds hasn’t either.
This latest statement adds: “Given that there is a significant level of uncertainty in terms of the eventual outcome, the ultimate financial impact could materially differ from the amount provided”.
Lloyds recorded a return on tangible equity (RoTE) of 12.3%, which is reasonable. But without the car loan provisions, it would have been up at 14%.
Cash cow
Statutory profit before tax, down 20%, fell short of the analyst consensus. Forecasts had £6.39bn on the cards, while Lloyds delivered short at £5.97bn.
Despite this stumble, Lloyds still has surplus capital to return to shareholders. It comes partly as a 15% hike in the full-year dividend to 3.17p per share, for a 5% yield on the previous day’s closing price. The board also announced a new share buyback of up to £1.7bn. Total capital returns for 2024 add up to £3.6bn, worth approximately 9% of the company’s market capitalisation.
These things, coupled with Lloyds’ outlook, are key for me. And that outlook suggests a RoTE of about 13.5% in 2025, and greater than 15% by 2026. That is, unless some new alleged misbehaviour should emerge and rack up sizeable provisions. I’d thought the banks might have learned to be squeaky clean after the PPI mis-selling scandal, but it seems not.
What does it mean?
Despite my misgivings, I think we’re seeing a pretty decent underlying performance here. Especially as Lloyds told us that “income grew in the second half of the year“. If it continues, that should support the latest guidance.
Would I buy more shares right now? I’m not so sure, though I see no pressing reason for me to sell. Forecasts indicate a 2025 price-to-earnings (P/E) ratio of 11, which I don’t see as screamingly cheap. But they also show a fall to only around 7.5 by 2026, and that does look like a bargain valuation.
A lot can happen between now and then, including the mis-selling conclusion. My personal stance remains to hold, with a side order of short-term nervousness. I’ll wait and see what the Supreme Court says.
