RBC analysts have warned expectations for share buybacks by Lloyds Banking Group PLC (LSE:LLOY) ahead are too high given uncertainty around the UK’s motor finance probe.
Pointing to consensus expectations for a new £1.8 billion buyback to be unveiled in full-year results, RBC forecast the figure at £1.0 billion.
“Uncertainty” would still exist around the Financial Conduct Authority’s investigation into historic motor finance commission payments when results were unveiled in February, RBC said.
More specifically, the result of an appeal to the Supreme Court against a ruling in October finding Lloyds and peers liable to potentially billions in compensation would not be out.
“Although the Court of Appeal may have got the law wrong,” analysts said in reference to the case, “we will not know what the Supreme Court thinks by [Lloyds’] results”.
“This is crucial for sizing the potential impact,” RBC added, highlighting Lloyds’ current provision of £450 million and excess cash of £2.0 billion.
“The problem is that the drafting of the Court of Appeal decision is so wide that the worst case impact is likely to be very large, even if the probability of the scenario materialising is very small.”
A £25 billion hit was expected across the sector from the probe, according to analysts, of which £8 billion was seen being shouldered by UK banks.
The worst case would see these figures rise to £33 billion for the sector and £11 billion for UK banks, RBC added.
“Whilst this disappointment might have a short-term negative impact on the shares [...] we would recommend buying into any weakness.”