The Lloyds Banking Group (LSE:LLOY) share price has fallen by 13.5% over the last week. The main reason has been news of potential liabilities related to car loans.
In general, the stock market doesn’t like uncertainty. But is there a chance investors could be overreacting to the bad news and creating a buying opportunity?
Why has the stock been falling?
Last week, the Court of Appeal ruled it unlawful for lenders to pay commissions to car dealers for loans, unless these were also disclosed to customers. This is a potential problem for Lloyds.
According to the latest estimates, the bank could face potential costs of £3.9bn. That’s more than the firm’s entire 2022 net income – and far more than the £450m the bank had put aside.
Realistically, I don’t see how this can turn out well for shareholders in the short term. The expectation is that share buybacks will be reduced or cut and this sounds plausible to me.
Nonetheless, I think a 13% fall in the company’s share price could well be something of an overreaction. And that means I’m wanting to take a closer look at the stock.
A £3.9bn liability
A £3.9bn liability isn’t a positive thing, but the fall in the Lloyds share price has been quite dramatic. The market value of the company has gone from £38.3bn to £32.9bn in the last week.
That means investors are getting a business with a potential £3.9bn cost, but they’re paying the equivalent of £5.4bn less for it. That might not look so bad.
Furthermore, analysts at RBC currently think £3.9bn is somewhere near a worst-case scenario. If that’s right, investors might think the uncertainty is creating a potential buying opportunity.
It’s not quite as straightforward as this, though. Despite Lloyds shares being cheaper than they were a week ago, I think they’re still some way from being an outright bargain.
Valuation
Even after the recent decline, the Lloyds share price is still 11% above where it was at the start of the year. And that’s despite falling interest rates weighing on lending margins.
The share price by itself doesn’t tell the full story, though. With banks, I think one of the best valuation metrics to use is the price-to-book (P/B) ratio.
Lloyds price-to-book ratio 2014-24
Created at TradingView
Despite the stock falling this week, Lloyds shares aren’t exactly trading at an unusually low P/B multiple. And adjusting for a £3.9bn hit to the company’s book value reinforces this idea.
Investors are clearly taking the risk of car loan litigation seriously. But they aren’t exactly treating it as the kind of crisis for the firm that might generate an unusually good opportunity.
Is the stock a bargain?
I’m going to keep a close eye on the situation with Lloyds. It wouldn’t be the first time that a stock market overreaction has provided a buying opportunity and it pays to be ready.
Right now, though, I think there’s a bit of a way to go before the share price is in what I would recognise as deep value territory. I think there are better opportunities at the moment.
This post was originally published on Motley Fool
