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Why did Lloyds shares fall to a 5-month low?

Lloyds' share price suffered this week under the weight of a new major lawsuit.

  • Lloyds (LON: LLOY) shares fell to a five-month low of 42.28 pence on Wednesday (08 September 2021)
  • Earlier this week, it was reported that 150 homeowners have sued the bank for losses incurred on mortgage loans taken in the 1990s
  • For now, most analysts remain optimistic about the FTSE 100 stock, with 16 out of 26 brokers rating it a ‘buy’
  • Keen to trade Lloyds shares? Open an account with us to start trading the stock.

Why is the Lloyds stock price falling?

Lloyds shares fell by 2.5% this week, as the group found itself in the midst of a new lawsuit.

It was reported earlier this week that 150 homeowners have sued the bank over thousands of pounds in losses incurred on shared mortgage loan facilities taken in the late 1990s.

According to court documents seen by the Financial Times (FT), the plaintiffs claimed in the suit that the mortgages were ‘fundamentally unsuitable’ and ‘inherently unfair’ under the terms of the Consumer Credit Act.

They also accused the bank of taking a ‘grossly excessive’ portion of the inflated house price over time. One customer said that she took out a loan of £187,000 for a £750,000 purchase in 1998. Today, the property is worth £2.8 million, but she owes Lloyds £1.6 million.

Lloyds has refuted the claims, retorting that all borrowers were provided with independent legal advice, The FT reported. The lender also argued that it would have had to bear risks if the reverse had happened, in which house prices had fallen.

A court date will be set in October 2021.

What’s next for LLOY shares?

Although the FTSE 100 stock is down 9% in the last one month, analysts remained largely optimistic on shares, with 16 recommending ‘buy’, seven suggesting ‘hold’, and three with ‘sell’ calls as of last week.

Their latest average 12-month target price, according to Bloomberg, stood at 52.49p. This represents a potential 24% upside from LLOY’s last traded price.

Two weeks ago, the UK’s third largest bank also said it would diversify into residential property investment through the UK’s build-to-rent sector, in the hopes of becoming one of the country’s biggest private landlords.

An internal job posting revealed that Lloyds is aiming to buy 10,000 homes by the end of 2025, and eventually 50,000 properties by 2030.

Heather Powell, partner at tax firm Blick Rothenberg, questioned whether the new homes Lloyds plans to buy will meet the needs of the majority of people ‘who are searching for affordable, not new, homes’.

FT columnist Helen Thomas opined that the property play was another sign of banks hunting for new revenue streams amid rock-bottom interest rates.

Thomas also described the retail bank’s aspirations as ‘surprisingly big’, partly because Lloyds may face reputational pitfalls in tenant management, and is also getting into housing equity ‘at a point when plenty of others looking for long-term, inflation-linked returns are doing the same’.

‘A strategic shift in search of returns into an at-best adjacent market seems the real risk here,’ she added.

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