Lloyds‘ (LSE: LLOY) shares have already lost some ground this year and could be in for more pain. From a high of 112.6p earlier this year, they traded at 97.6p as the market closed Friday (24 April).
That’s roughly a 13.3% drop — a pull‑back that sets the scene for the latest bit of drama.
Legal action
The issue is a fresh challenge to the Financial Conduct Authority’s (FCA) compensation scheme for mis‑sold car finance. Consumer group Consumer Voice has told the regulator it plans to take the £9.1bn redress plan to the Upper Tribunal.
The group feels the FCA’s method of calculating losses will not sufficiently compensate many drivers. Currently, the scheme covers about 12.1m car finance agreements, with average payouts expected to be around £830 per claim.
Consumer Voice says millions of agreements risk being left out or under‑compensated. The FCA, for its part, insists its scheme is the quickest and fairest way to get money back to customers.
So how exposed is Lloyds?
The Black Horse bank has already set aside about £1.95bn to deal with motor finance complaints, after topping up provisions by a further £800m last year.
It currently thinks that’s enough, even after reviewing the FCA’s final rules. However, if the legal action forces the regulator to widen the scheme or increase payouts, the bill could rise.
That’s the main financial risk from this latest move. If it needs to put more money aside, will the business be okay — and, more importantly, how will investors be impacted?
Financially robust
Despite these ongoing issues, company financials still look solid. Last year it reported statutory profit before tax of £6.7bn, up 12% on the previous year.
Total income reached £19.4bn, up 8%. Meanwhile, net interest income grew as higher rates boosted margins, with the margin reaching around 3.06%. Those earnings should give Lloyds some breathing space to cover higher charges, even if they’re uncomfortable.
But the news alone could still impact the share price. So how should investors react?
Pros and cons
For long-term investors, the core income narrative still looks stable… for now.
In 2025, Lloyds paid a total dividend per share of 3.65p, a 15% increase from 2024. At today’s share price, that equates to a yield of roughly 3.4%, with earnings per share almost double that. So coverage is good and the dividend looks sustainable.
But could dividend gains be lost in a share price decline? To assess that, we need to look at the bank’s valuation metrics.
It currently trades on around 14 times recent earnings, with a price-to-book (P/B) ratio of 1.38. That’s not too demanding for a profitable, established bank — but it isn’t exactly cheap either. That means the price is already sensitive and could take a hit if the new legal action ramps up the bill.
So what’s the verdict?
A quick check of analysts and brokers reveals that most still rate Lloyds a Buy. Average 12-month price forecasts sit between 118-119p, implying expected growth of around 21% (if things go to plan).
A heavy reliance on the health of the UK economy, along with the motor finance scandal, add risk. But looking at the bank’s strong capital generation and dividend strength, I’d say it’s still worth considering.
