The Lloyds (LSE:LLOY) share price tanked in late October on the back of fresh concerns about motor finance commissions. It has since recovered somewhat, partially because of the US election result which is seen as being positive for stocks and, notably, banks.
So, where will the Lloyds share price end the year? Let’s take a closer look at what might happen.
A landmark ruling
Investors in Lloyds have been concerned about fines related to motor finance commission for some time, and a ruling in October brought these worries back to the surface.
The court ruling mandates that motor dealerships must disclose any commissions received from lenders — like Lloyds. Banks are now liable to return the commissions to the customer, which could lead to increased compensation claims for mis-selling.
Analysts at RBC now estimate that Lloyds may face costs of up to £3.9bn, significantly higher than previous projections. For context, Lloyds posted a profit before tax of £7.5bn last year.
Of course, these liabilities may not amount to £3.9bn, but it will likely mean Lloyds has to put more money aside to potentially compensate customers.
Strong lending environment
Despite the above, the current economic environment presents favourable conditions for banks like Lloyds. With interest rates cut to 4.75%, banks can benefit from increased lending activity as borrowing becomes more affordable for consumers and businesses. This could lead to more loans and potentially improved net interest margins.
Additionally, the positive outlook for UK economic growth, as indicated by Lloyds Bank’s Financial Institutions Sentiment Survey, suggests a healthier business environment. Nearly half of senior decision-makers expect improved economic growth over the next 12 months, which could translate into increased demand for financial services and products.
Furthermore, the unwinding of interest rate hedges — a practice to lower sensitivity to interest rates — could lift Lloyds’ earnings by up to 80% over time. As such, even in a falling interest rate environment, the bank’s structural hedge should boost earnings.
Earnings forecast
According to analysts’ forecasts, Lloyds is set to earn 6.4p per share in 2024 and the same again in 2025. The 2025 forecast is lower than I recall it being a few weeks ago, and this likely reflects additional costs related to the motor finance issue. However, in 2026, the bank is forecasted to earn 8.5p per share, which would take the forward price-to-earnings (P/E) ratio to 6.4 times.
Possible ending to 2024
In short, it’s certainly not an expensive stock, trading at 8.5 times projected earnings for 2024 and with a 5% dividend yield. Personally, I think the data shows that Lloyds is undervalued. With American peers like JPMorgan trading at nearly 14 times earnings, Lloyds could be trading at closer to 10 times earnings while still being significantly discounted compared to its US peers.
I’m also not convinced that the unwinding of the structural hedge is thoroughly priced in. Only time will tell, but some forecasts are suggesting an 80% uplift in earnings.
So, in the near term at least, I’d expect to see Lloyds shares push towards the average share price target — 65p. Conservatively, I’d suggest it could hit 60p again before the start of the new year.
Personally, because of concentration risk, I won’t be increasing my position in Lloyds. But I’m still upbeat on the stock.
This post was originally published on Motley Fool
