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Last week was a great time to own Lloyds (LSE:LLOY) shares. The British banking giant saw its market cap surge more than 10% on Monday following the long-anticipated court ruling relating to the motor financing mis-selling scandal. And while a bit of profit-taking activity followed, the share price has still broken through and remained above the 80p threshold for the first time since 2015.
As such, anyone who put in £5,000 right before this bump is now sitting comfortably on around £5,326 – not bad for a single week. But with such a massive cloud of uncertainty now lifted, could Lloyds shares be on track to climb even higher?
What happened?
As previously mentioned, the main catalyst behind this boost stems from the Supreme Court’s favourable ruling. It concluded that car dealers do not owe fiduciary duties to customers and that the payment of commissions linked to car finance from banks like Lloyds isn’t inherently unlawful.
So, is Lloyds off the hook?
Not quite. The Financial Conduct Authority is still proceeding with a targeted redress scheme to compensate car buyers who were impacted by discretionary commission arrangements. This is where car dealers would earn a higher commission by charging a higher interest rate. But with an estimated compensation of £950 per customer, the £1.2bn that Lloyds has already put aside is expected to cover the bulk of its exposure.
Time to consider buying?
With the threat of a massive legal penalty now eliminated, investor sentiment has improved significantly. And the analyst team at Goldman Sachs subsequently upgraded its Lloyds share price forecast to 99p. That’s around 23% higher than current levels. And if accurate, would grow the previous £5,000 investment even more to £6,550.
Of course, forecasts need to be taken with a pinch of salt. Goldman’s projection is based on Lloyds delivering 8% annual core revenue growth between 2024 and 2027. It also depends on management successfully delivering on its target of 13.5% return on tangible equity.
The favourable banking environment certainly makes this possible, especially now that the legal risk has reduced drastically. However, that doesn’t guarantee Lloyds shares will be a winning investment.
The bank’s performance is ultimately tied to the state of the British economy. A sudden or even gradual slowdown could reduce lending demand as well as send borrower default rates in the wrong direction.
Lower interest rates should help spark demand, particularly for mortgages. But if there’s an insufficient volume of new loans, Lloyds could struggle to offset the drop in expected interest income. In such a scenario, Lloyds will likely fall short of Goldman’s growth expectations.
The bottom line
One of the biggest risk factors surrounding Lloyds appears to now be in the rearview mirror. It comes as a major relief to shareholders who are now able to focus more on the underlying fundamentals rather than the legal landscape. And with the shares trading at a relatively modest price-to-earnings ratio, continued performance could help elevate the share price further and support the 4.1% dividend yield.
Lloyds shares are unlikely to skyrocket, so growth investors are probably better served considering stocks elsewhere. But for more conservative income-seeking individuals, Lloyds shares could now be worth mulling over.
