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He Lloyds Banking Group (LSE:LLOY) The share price ended November pretty much where it started the month. This doesn't seem like anything new, but it's more interesting than it seems.
In a month where Barclays and NatWest Both saw their shares rise more than 5%; the fact that Lloyds is going nowhere is disappointing. So what should investors think about the stock?
What happened in November?
The market is still reckoning with news that Lloyds could be in trouble for car loan practices. That risk has been known for a long time, but it became more real at the end of October.
There is still much to be decided, including how much customers will be entitled to, what periods will be covered and how many will actually claim it. That makes things quite uncertain.
It is difficult to be confident in valuing a stock when it could have future liabilities of an unspecified magnitude. And that is the main reason why Lloyds' share price has underperformed its rivals.
Barclays and NatWest are less exposed to car loans. But the big question now is whether the drop in Lloyds' share price is an opportunity or a trap. I think it could be both.
Assessing the damage
Estimates of what Lloyds could be liable as a result of the car loan investigation vary. The highest figure I have seen so far is £3.9bn.
That's just under 1% of its total loan portfolio, where most of the bank's profits come from. But shares fell more than 14% on the news.
Put another way, a potential £3.9bn fine has caused the company's market capitalization to fall by around £5.5bn. And that's leaving aside the fact that other bank stocks have risen in this time.
There is also reputational damage to consider. And while that's even harder to quantify, I think it would be worth taking a closer look at the stock.
Short term versus long term
The way I see it, the question of whether investors should see this as a big deal comes down to how long they want to own the stock. The longer it is, the less I think you should worry.
£3.9bn represents around a third of the bank's annual net interest income. In the context of a five-year investment, that represents about 6% of the expected profit, which is quite significant.
However, over 30 years, £3.9bn looks more like 1% of total profit. And that is within the safety margin. I think investors should consider buying shares first.
It's not just the £3.9bn that matters: it's the return Lloyds would have generated in the future. But even so, a longer term means that the overall significance of the fine decreases.
Chance?
Car loan liabilities are not the only reason Lloyds' share price fell in November. The bank listed £185m of new shares to be used as part of employee incentive schemes.
Although I don't see it as a major problem. It limits the effect of the company's share buyback program, but not by a significant amount.
Overall, I think the stock is worth considering from a long-term perspective. The outlook for the near future may be weak, but the decline in the share price greatly influences this.
