The PPI scandal cost Lloyds Bank (LON: LLOY) dear — in total, it had to fork out £22 billion in compensation. To put that in context, the bank’s market cap is currently £30 billion, so that was quite the hit. Now Lloyds is in court again, this time over mortgages it used to provide which were tied to the value of the property they were secured against.
One hundred fifty homeowners have brought the lawsuit. The saga goes back to the mid-1990s, when the Bank of Scotland, now a part of Lloyds, provided loans linked to a property’s value. In some cases, customers were able to borrow 25 per cent of a property’s value, in return the bank received 75 per cent of any appreciation in the asset. The mortgage lending approach was a kind of forerunner to equity release schemes. House prices have increased enormously in value since then, and the Law Firm representing the mortgage holders says that the mortgages were “fundamentally unsuitable” and “inherently unfair.” To put the scheme in the context of that time, it might be worth recalling that the beginning of the 1990s saw a house price crash, followed by a prolonged recovery.
The law firm in question says that the claim could be for as much as £50million. The Lloyds share price fell sharply on the news of the legal suit, but then again Lloyds shares had fallen heavily even before news of the legal case broke. Lloyds shares have lost almost ten per cent since the beginning of June, slicing around £3 billion off its value.
Is Lloyds now a bargain?
The big appeal with the Lloyds share price is its potential as a dividend stock. See Five reasons why a Lloyds Bank dividend bonanza is close.
In 2018, Lloyds paid an annual dividend of 3.21p. If the bank were able to return to that dividend level, then the dividend yield would be 7.5 per cent at the current share price. However, there are reasons to think that Lloyds can go one step further and start paying out even higher dividends. When we considered this opportunity back in June, we suggested a ten per cent dividend yield was on the cards. See Could Lloyds Banking Group dividends soar? But the share price has fallen since then, assuming the logic presented three months ago still stands, then the potential for the Lloyds dividend yield is even greater.
The latest mortgage lawsuit could put a dent in Lloyds’ dividend capability, but it does seem that the impact will be pretty small. The maths is quite simple. Let’s assume that without the lawsuit, its dividend can return to the 2018 level. That year, the Lloyds dividend was around £4 billion (including share buybacks). If the lawsuit costs the bank £50m, that would represent less than two per cent of the annual dividend that year — which would mean a tiny one-off impact on the dividend yield. Income investors only need to worry about this lawsuit if we see a significantly higher number of claims follow.
Lloyds as a landlord
Lloyds recently announced plans to become the UK’s largest landlord. Under a scheme called Citra Living, it intends to buy 10,000 homes by the end of 2025 and then a further 40,000 properties by the end of this decade.
For investors, this creates another interesting aspect to Lloyds — it gives them a slice of the buy-to-let market without having to either buy a property or let it out!
The income proposition
It probably boils down to how the UK economy performs this decade and what happens to house prices. If you believe that the prognosis for UK house prices is good and your main priority from investing is income, then Lloyds Bank shares look compelling indeed.
Not Investment Advice
Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.