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He Lloyd's (LSE:LLOY) share price suffered a sharp 14% drop last month, deviating from a steady rise throughout the year. He FTSE 100 fell 2.12% during the same period.
It came after news that shareholders could bear the brunt of potential £1bn costs related to the ongoing investigation into car finance. The controversy first came to light earlier this year, but the full extent of the issue was not immediately clear.
Now Lloyds looks likely to halve its £2bn share buyback programme.
Lloyds is not the only one affected, with Close Brothers Group falling 37%. Former NatWest Chairman Sir Howard Davies has blamed the Financial Conduct Authority (FCA) for failing to provide clarity on the implications of the ruling.
What factors could help the price recover?
An evolving economic landscape
This year's changing economy has impacted Lloyds in several ways. The initial rise in interest rates boosted its margins, helping it generate revenue from its core lending business. But now that rates are falling, things are changing.
However, interest rates are a double-edged sword: while high rates improve lending margins, they also create fierce competition in the savings market. This may force banks to offer higher rates to retain deposits.
For the most part, Lloyds maintained its leadership in the mortgage market and took a conservative stance on asset quality. Additionally, it developed a cautious outlook on impairment charges due to the potential for increased loan defaults.
Digital to the rescue
As new online banks across Europe gain favor with younger consumers, traditional banks must adapt to keep up. To meet this demand, Lloyds is investing £3 billion in a digital transformation.
However, adapting legacy systems while meeting customer expectations and competing with fintech startups is no easy task.
Lloyds has been improving its online banking and mobile applications for several years. He has also started new projects with Service now, microsoft and Google Cloud to improve HR and customer service functions.
Most recently, it partnered with Cleareye.ai to reduce overhead through ai-powered automation in commerce and fulfillment.
The initial investment is high but is aimed at reducing costs significantly in the future. It remains to be seen whether it will be enough to offset the costs of the financial investigation.
Financial situation
The share price has already started to recover from last week's fall, demonstrating Lloyds' resilience. However, it may struggle to match the growth it enjoyed in the first half of the year.
In the latest third-quarter results, earnings per share (EPS) missed analyst expectations by 19% and net income fell 1.7% compared to the third quarter of last year.
Total assets grew to £900bn, while debt fell to £81.6bn.
It projects a gradual return on tangible equity (RoTE) of around 13% by 2024, with the aim of achieving greater efficiency and cost control in the coming years.
The car finance investigation has cast a shadow over Lloyds throughout 2024. However, the most recent ruling over the payment of “secret” commissions was probably the biggest surprise. If more details emerge, the share price could suffer further losses.
However, it has already recovered 3.5% this month and remains 15% higher so far this year. Considering the bank's resilience so far and its focus on technology upgrades, I think it could continue to recover from here.
