Can Lloyds' share price withstand the second wave of PPI claims?

Lloyds’ [LLOY] share price was battered last year by the twin spectres of Brexit and PPI claims. While the UK's departure from the EU is still an ongoing issue, most thought that the PPI saga was over. A recent court ruling has prepared the way for more PPI claims, however, threatening further losses for Lloyds’ share price.

So, what triggered the return of PPI, and what does this mean for Lloyds’ share price?

Why has PPI come back?

PPI claims have been haunting banks for the last couple of years, as repeated rulings found that Payment Protection Insurance was repeatedly sold to people who were not eligible for cover. These initial claims limited banks’ profits and, as a result, really hit Lloyds’ share price.

A more recent series of court rulings have found that PPI was additionally 'unfair' because banks did not disclose the commission charged. According to The Sunday Times, up to 95% of a policy's cost was commission in the most serious cases.

This means that those denied compensation or who only received some money back previously can now make a new claim. It also means that those who never claimed in the first place can do so, even if they missed the August 2019 deadline.

In total, UK banks paid out £38bn in compensation, with a total of 32.4 million claims being made. That figure could be set to see a sharp increase.

How damaging was PPI to Lloyds’ share price?

Lloyds was hit the hardest of the UK banks, with an eye-watering £22bn PPI bill. The next nearest bank was Barclays [BARC], which had to shell out £11.1bn in claims.

The brunt of PPI claims came during third quarter 2019 results, with Lloyds taking a £1.8bn hit. This all but wiped out third-quarter profits, which came in at £50m, down from the £1.8bn seen in the same period in 2018.

"I am disappointed that our statutory result was significantly impacted by the additional PPI charge in the third quarter, driven by an unprecedented level of PPI information requests received in August," outgoing CEO António Horta-Osório said at the time.

For the full year 2019, Lloyds paid out £2.4bn in PPI charges. Overall, profits came in at £4.4bn in 2019, down from £6bn a year earlier. The impact was significant enough that the bank was forced to reduce its bonus pool by 33% to £310m.

“I am disappointed that our statutory result was significantly impacted by the additional PPI charge in the third quarter, driven by an unprecedented level of PPI information requests received in August” - CEO António Horta-Osório

What does this mean for Lloyds’ share price?

For Lloyds, PPI's resurrection couldn't have come at a worse moment. Half-year results saw the bank post a £676m pre-tax loss, down from a £1.3bn profit for the same period last year. The bulk of these losses came from the bank having to set aside a further £2.4bn to cover the costs of any loan defaults as the coronavirus weighs on the economy.

With the ending of the government's furlough scheme, a sharp rise in unemployment this autumn could see more people struggling to pay back loans. Historically low-interest rates are adding additional pressure, meaning the bank can't make as much money from lending.

Simply put, having to pay out more PPI claims could mean the bank struggles to return to profitability and Lloyds’ share price could drop further as a result.

Lloyds share price vitals, Yahoo Finance, 24 August 2020

So, time to buy Lloyds?

While all this makes for gloomy reading, for the bargain hunter Lloyds’ share price could be a steal. The stock is still down 55.89% this year-to-date (as of 21 August’s close), but analysts seem confident the stock will return to trading above the 30p mark soon.

Analysts tracking Lloyds’ share price on the Financial Times have pinned an average 37.5p price target on the stock. Hitting this would see a 33.45% upside on Lloyds’ share price through 21 August’s close.

Of the 24 analysts offering recommendations 4 rate it a Buy and 11 Outperform.