Is the automotive mortgage strain on Lloyds shares actually lastly over?

Lloyds Banking Group (LSE: LLOY) shares gained 3% early Wednesday (8 October), as the following act within the automotive mortgage mis-selling drama unfolds.

The financial institution mentioned it “notes the latest FCA announcement … on an industry-wide redress scheme for motor finance.”

Lloyds is “at the moment assessing the implications and influence … and can replace the market as and when acceptable.”

Automobile mortgage redress

The day earlier than, Monetary Conduct Authority (FCA) CEO Nikhil Rathi mentioned: “It’s time their prospects get truthful compensation.” But it surely sounds prefer it may be lower than debtors had hoped.

The FCA had beforehand indicated common compensation approaching £950 per buyer. It’s now airing a sum of round £700.

However complete {industry} payouts may nonetheless attain £8.2bn, because the FCA suggests round 44% of motor finance agreements since 2007 could possibly be eligible.

Maybe unsurprisingly, the Finance and Leasing Affiliation — representing the lending {industry} — thinks that’s an excessive amount of. Director Adrian Dally informed the BBC the variety of individuals lined up for a possible payout “appears implausibly excessive“.

Not over but

So to reply my headline query, no, it’s not throughout but.

However it is a key milestone, bringing us nearer to quantifying the injury. Eradicating a lot uncertainty have to be a aid for shareholders. It’s for me — I nonetheless had a nagging concern the FCA may come down rather a lot tougher than we’d anticipated.

The choice additionally units a timescale for the ultimate curtain. By numerous routes, relying on particular person circumstances, automotive mortgage prospects can have 12 months from the beginning of the scheme to make their claims. So it’s going to take no less than that lengthy earlier than the ultimate value may be totted up.

What to do subsequent?

I doubt this can make any actual distinction to shareholders. Those that didn’t just like the look of issues and determined to promote will certainly have already bought. And people of us who held… properly, I can solely communicate for myself, however the newest occasions reinforce my determination.

What about these considering of shopping for, however holding off till this factor performs out?

For me, it might be based mostly on the identical elements as ever. That’s the present valuation, the dividend yield, the forecasts, and the long-term way forward for the banking sector. To place the final first, banking is a vital for each facet of contemporary life and enterprise — and that’s not going to vary.

Valuation, valuation

Wanting on the relaxation, a forecast price-to-earnings (P/E) ratio of 12 for the present 12 months seems a bit excessive. Analysts see it dropping to 7.5 by 2027, and I’d charge that as low-cost once more. However rather a lot can occur between from time to time, particularly with the financial system nonetheless in such a poor state. And Lloyds could be very a lot uncovered to the place rates of interest go.

The expected 4% dividend yield is nothing to shout about. Forecasts present it rising, although that’s removed from assured.

Total, I’d decide Lloyds shares as about truthful value proper now. However with my long-term specs on, I’m contemplating topping up.