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I Lloyds Banking Group (LSE:LLOY) share price has fallen 13.5% in the past week. A major reason has been potential credit issues related to auto loans.
In general, the stock market does not like uncertainty. But is there a chance that investors can overreact to bad news and create a buying opportunity?
Why is the stock falling?
Last week, the Court of Appeal ruled that it is illegal for lenders to pay commissions to car dealers to secure loans, unless this is disclosed to customers. This is a potential problem for Lloyds.
According to the latest estimates, the bank could face costs of up to £3.9bn. That’s more than the company’s net cash for 2022 – and well above the £450m the bank had set aside.
Frankly, I don’t see how this could be good for shareholders in the short term. The expectation is that share buybacks will be reduced or discontinued and this makes sense to me.
However, I think a 13% drop in the company’s value may be an overreaction. And that means I want to take a closer look at the stock.
Debt of £3.9bn
£3.9bn of debt isn’t great, but the fall in Lloyds’ share price has been spectacular. The company’s market value rose from £38.3bn to £32.9bn last week.
That means investors are getting a business worth £3.9bn, but paying the equivalent of £5.4bn less. That might not seem so bad.
In addition, analysts at RBC he currently thinks £3.9bn is somewhere near the worst. If that is the case, investors may think that the uncertainty creates a potential buying opportunity.
It’s not as straightforward as this, though. Despite Lloyds shares being cheaper than last week, I think they are still some way under-selling.
Measurement
Even after the recent decline, Lloyds’ share price is still more than 11% above where it was at the start of the year. And that’s despite lower interest rates weighing on the borrowing limit.
The share price itself does not tell the full story, however. For banks, I think one of the best valuation metrics you can use is the price-to-book (P/B) ratio.
Lloyds price-to-book ratio 2014-24
Created in TradingView
Despite the stock’s fall this week, Lloyds shares aren’t exactly trading at an unusually low P/B ratio. And a £3.9bn adjustment to the company’s book value reinforces this view.
Investors obviously take the risk of a car loan lawsuit seriously. But they don’t treat it well as the kind of company problem that could present an unusually good opportunity.
Is stock money?
I will keep a close eye on the situation with Lloyds. It wouldn’t be the first time that a stock market overreaction has presented a buying opportunity and it pays to be prepared.
Right now, however, I think there is a little way to go before the share price is in what I would see as deep value territory. I think there are better opportunities right now.
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