On 20 February, when the financial institution’s scheduled to launch its outcomes for the yr ended 31 December 2024 (FY24), I feel the Lloyds Banking Group (LSE:LLOY) share price will come below the highlight as soon as once more.

Sure, it’ll be attention-grabbing to see whether or not the banking big’s efficiency has crushed analysts’ expectations. The typical forecast of the 18 brokers masking the inventory is for a post-tax revenue of £4.64bn (FY23: £5.52bn). Following latest base fee cuts, they’re anticipating Lloyds’ web curiosity margin (NIM) to come back below strain. Their FY24 consensus is for a NIM of two.95% (FY23: 3.11%).

Motor finance points

Nevertheless, I’m extra fascinated about what the financial institution has to say in regards to the ongoing evaluate by the Monetary Conduct Authority (FCA) into the potential mis-selling of automotive finance.

In February 2024, the financial institution made a provision of £450m in its accounts to cowl potential prices and compensation for purchasers.

Accounting requirements require such an entry to be made when it’s “probable” that an outflow of financial assets will outcome. This tells me that Lloyds’ administrators consider there’s more likely to be some monetary penalty. Nevertheless, if newest estimates from Keefe, Bruyette & Woods (KBW) show to be appropriate, it may very well be on the low aspect.

KBW has come up with a “conservative” prediction that the Black Horse financial institution might finish up paying £4.2bn because of the ‘scandal’.

I feel that is essential as a result of we’ve seen how delicate the financial institution’s share price has been to the problem.

On 25 October 2024, its shares tumbled 7.3% when the Court docket of Enchantment made a ruling that Lloyds stated “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 inventory rose 4% when reviews emerged that the federal government would search to precise its considerations to the Court docket that the case might undermine confidence in UK monetary regulation. Since then, the share price has risen by an additional 2.6%.

Timing is every part

The FCA investigation and unconnected authorized instances have develop into a little bit of a distraction.

It’s a disgrace as a result of analysts are forecasting sturdy development — they’re anticipating a FY27 revenue after tax of £6.04bn. If realised, earnings can be 30% greater than the FY24 consensus. These similar ‘experts’ are predicting a 2027 dividend of 4.26p — a formidable yield of 6.8%.

After all, a lot can occur over the following three years.

The financial institution derives almost all of its earnings from the UK. And the home financial system is proving to be fragile, which might have an effect on earnings and its dividend. Any improve in mortgage defaults will have an effect on its backside line.

Nevertheless, in my opinion, essentially the most urgent subject is the FCA investigation. Don’t get me unsuitable, I consider the financial institution has the monetary firepower to deal with a £4.2bn (or greater) value. Any fines and compensation are more likely to be paid over a number of years. At 30 September, its stability sheet exhibits money of £59bn.

However within the quick time period, I believe the share price will come below strain if the supply’s elevated. Due to this fact, if an investor was seeking to purchase Lloyds shares, I’d recommend they think about ready for the outcomes announcement earlier than making a choice.