Is the Lloyds share price a bargain after a 13.5% drop?

Lloyds Banking Group (LSE:LLOY) share price fell 13.5% last week. The main reason for this was the news about possible liabilities regarding vehicle loans.

Generally, exchange Doesn’t like uncertainty. So, is there a possibility that investors will overreact to the bad news and create a buying opportunity?

Why is the stock falling?

Last week the Court of Appeal ruled that it was illegal for lenders to pay commission to car dealers for loans unless this was also disclosed to customers. This is a potential problem for Lloyds.

Latest estimates suggest the bank could face potential costs of £3.9 billion. This is far more than the firm’s entire 2022 net income and the £450 million the bank has set aside.

Realistically, I don’t see how this could work out well for shareholders in the short term. The expectation is that share buybacks will be reduced or cut, and this seems reasonable to me.

However, I think the 13% drop in the company’s share price may have been an overreaction. That means I want to take a closer look at the stock.

Liability of £3.9bn

A £3.9bn liability is not a positive thing, but the fall in the Lloyds share price has been quite dramatic. The company’s market value rose from £38.3bn to £32.9bn last week.

This means investors are getting a business that potentially costs £3.9bn, but they are paying less for it, equivalent to £5.4bn. This might not seem so bad.

Additionally, analysts RBC They currently think £3.9bn is close to the worst-case scenario. If this is true, investors may think that uncertainty creates a potential buying opportunity.

However, it is not that simple. Although Lloyd’s shares are cheaper than a week ago, I think they are still far from a direct bargain.

Valuation

Even after the recent decline, the Lloyds share price is still 11% above where it was at the beginning of the year. And this is despite falling interest rates putting pressure on credit spreads.

But share price alone doesn’t tell the whole story. I guess with banks One of the best valuation metrics available is the price-to-book (P/B) ratio.

Lloyds price-to-book ratio 2014-24

Created in TradingView

Despite the shares falling this week, Lloyds shares are not trading at an unusually low P/B multiple. And a £3.9bn hit to the company’s book value reinforces the idea.

Investors clearly take auto loan lawsuit risk seriously. But they don’t treat this as exactly the kind of crisis that could create an unusually good opportunity for the firm.

Is the stock a bargain?

I will be monitoring Lloyds’ situation closely. This isn’t the first time a stock market overreaction has presented a buying opportunity, and it’s good to be ready.

However, I currently think there is some way to go before the share price reaches what I would describe as deep value territory. I think there are better opportunities right now.