Regardless of the continuing investigation into motor loans, shares in Lloys Banking Group (LSE:LLOY) are up virtually 38% within the final 12 months. That’s clearly an excellent consequence, but it surely’s price placing into context.

Whereas 38% is sufficient to flip £10,000 into £13,800, traders who purchased shares in Barclays or NatWest have fared even higher. And that is one thing traders ought to take note of. 

Motor loans

There are a few causes Lloyds shares have trailed a few of the different UK banks over the past 12 months. However the largest is the continuing investigation into motor loans. 

The financial institution has extra publicity to the potential liabilities arising from the case than both NatWest or Barclays. And the financial institution has put apart £1.2bn to cowl potential liabilities. 

That’s round 10% of the agency’s web curiosity earnings from 2024 and two-thirds of the money it used for dividends. This has been weighing on its monetary outcomes and explains the inventory efficiency.

The Supreme Courtroom’s verdict is due in July. And whereas there’s clearly a giant danger right here, issues may go very properly for Lloyds if the decision is beneficial. 

Structural hedge

By way of motor loans, Lloyds is at a transparent drawback to Barclays or NatWest. But it surely is likely to be in a greater place to deal with a distinct potential danger. 

Rates of interest within the UK have been falling and this sometimes means decrease lending margins. Banks, nonetheless, sometimes make fixed-income investments to attempt to restrict the danger of modifications in charges. 

This is called structural hedging. When rates of interest are excessive, it may act as a drag on earnings, however when charges begin to fall – as they’re now – it may present a lift to web earnings.

Lloyds goes about it in a extra dynamic and fewer mechanical means than the opposite UK banks. And this would possibly properly show to be a bonus with charges coming down within the close to future. 

Valuation

Lloyds shares at the moment commerce at a price-to-book (P/B) ratio of round one. That’s decrease than NatWest, but it surely’s in direction of the upper finish of the place the inventory has been buying and selling over the past 10 years.

On this foundation, the share price doesn’t look unusually low-cost. Extra precisely, it doesn’t look as if traders are notably pessimistic in regards to the firm in the intervening time.

Given the continuing motor mortgage investigation, I discover this shocking. I feel the result is tough to foresee and that is one thing that I’m unsure is mirrored within the share price.

Buyers who purchased Lloyds shares 12 months in the past have executed very properly. However regardless of the inventory underperforming a few of its rivals, I don’t see an apparent shopping for alternative for my very own portfolio in the intervening time. 

Investing in banks

I feel banks will be terrific investments. However their companies are usually extra cyclical than common and their share costs fluctuate accordingly. 

With Lloyds particularly, shopping for the inventory forward of the upcoming Supreme Courtroom verdict seems massively dangerous. And I want to keep away from uncertainty as a lot as doable with my investing.

A constructive end result for the corporate may give the inventory a giant enhance. However traders contemplating shopping for shares in the intervening time ought to at the least concentrate on the potential for issues to go incorrect.