Lloyds shares sank at the end of last week as investors dumped the stocks following a ruling by the Court of Appeal against Lloyds, potentially paving the way for billions of pounds in redress.
Lloyds has already set aside £450m to meet the demands of any potential litigation. The drop at the end of last week would have been a mix of disappointment that the provision for redress now looks unlikely to be reversed in the coming periods and out and out of fear that Lloyds could have to stump up far more.
The Court of Appeal ruling announced on Friday could have set the wheels in motion for a multi-billion pound redress scheme. The court ruled that car finance providers must be transparent in disclosing fees amid complaints from consumers about high commissions.
The uncertainty surrounding Lloyds’s potential liability has taken shares from 62p on Friday to beneath 57p in the very early minutes of Monday’s trade.
This is a sharp drop for a share price that has been in a steady uptrend for most of 2024.
While the drop may draw some investors into buying the dip, there are a number of other considerations for Lloyds.
By all accounts, Lloyds’ Q3 update was fantastic. Impairments due to bad debts were lower than analysts had predicted, meaning profits were higher than expected, and the market gave Lloyds its stamp of approval by taking shares to the highest levels since 2019 last week.
However, lower-than-expected impairment charges masked falling income, which is likely to persist in the coming quarters. Lloyd’s top line is inextricably linked to interest rates and the net interest margins it can generate from lending and deposits activity.
The Bank of England will likely cut rates again in the coming months, adding further pressure to net interest margins. Lloyds will have to rely on robust demand for mortgages and other lending products to maintain its income.
A softening economic backdrop will raise concerns about this being achieved, given the UK economy produced very little growth in Q3 and the new Labour government has so far failed to promote any growth or optimism around the UK economy. By all accounts, it has done the complete opposite.
Motor financing redress is likely to be a slow-moving risk that could weigh on Lloyds shares for the foreseeable future, but the next major catalyst for the Lloyds share price is this week’s budget and perceptions of whether any measures announced by Labour will be supportive of lending activities and the broader economy.