The Lloyds Banking Group (LSE:LLOY) share price has fallen by 13.5% during the last week. The primary cause has been information of potential liabilities associated to automotive loans. 

Typically, the inventory market doesn’t like uncertainty. However is there an opportunity buyers might be overreacting to the dangerous information and making a shopping for alternative?

Why has the inventory been falling?

Final week, the Courtroom of Attraction dominated it illegal for lenders to pay commissions to automotive sellers for loans, until these had been additionally disclosed to clients. This can be a potential drawback for Lloyds.

In response to the most recent estimates, the financial institution might face potential prices of £3.9bn. That’s greater than the agency’s complete 2022 internet earnings – and way over the £450m the financial institution had put apart.

Realistically, I don’t see how this will prove nicely for shareholders within the brief time period. The expectation is that share buybacks will likely be lowered or minimize and this sounds believable to me.

Nonetheless, I feel a 13% fall within the firm’s share price might nicely be one thing of an overreaction. And which means I’m eager to take a better take a look at the inventory. 

A £3.9bn legal responsibility

A £3.9bn legal responsibility isn’t a constructive factor, however the fall within the Lloyds share price has been fairly dramatic. The market worth of the corporate has gone from £38.3bn to £32.9bn within the final week.

Which means buyers are getting a enterprise with a possible £3.9bn price, however they’re paying the equal of £5.4bn much less for it. Which may not look so dangerous. 

Moreover, analysts at RBC at present suppose £3.9bn is someplace close to a worst-case state of affairs. If that’s proper, buyers would possibly suppose the uncertainty is creating a possible shopping for alternative. 

It’s not fairly as easy as this, although. Regardless of Lloyds shares being cheaper than they had been every week in the past, I feel they’re nonetheless a way from being an outright discount. 

Valuation

Even after the current decline, the Lloyds share price continues to be 11% above the place it was at first of the 12 months. And that’s regardless of falling rates of interest weighing on lending margins. 

The share price by itself doesn’t inform the total story, although. With banks, I feel top-of-the-line valuation metrics to make use of is the price-to-book (P/B) ratio. 

Lloyds price-to-book ratio 2014-24

Created at TradingView

Regardless of the inventory falling this week, Lloyds shares aren’t precisely buying and selling at an unusually low P/B a number of. And adjusting for a £3.9bn hit to the corporate’s guide worth reinforces this concept. 

Traders are clearly taking the danger of automotive mortgage litigation severely. However they aren’t precisely treating it because the sort of disaster for the agency which may generate an unusually good alternative.

Is the inventory a discount?

I’m going to maintain a detailed eye on the scenario with Lloyds. It wouldn’t be the primary time {that a} inventory market overreaction has supplied a shopping for alternative and it pays to be prepared.

Proper now, although, I feel there’s a little bit of a approach to go earlier than the share price is in what I’d recognise as deep worth territory. I feel there are higher alternatives for the time being.