The Lloyds (LSE: LLOY) share price took a sharp 14% dive last month, deviating from an otherwise steady rise throughout the year. The FTSE 100 fell 2.12% over the same period.

It followed news that shareholders may take the brunt of potentially £1bn in costs related to the ongoing car financing probe. The controversy first came to light earlier this year but the full extent of the issue was not immediately made clear.

Now, Lloyds looks likely to cut its £2bn share buyback programme in half.

Lloyds is not the only one affected, with Close Brothers Group falling 37%. Former NatWest chair Sir Howard Davies has blamed the Financial Conduct Authority (FCA) for failing to provide clarity on the implications of the ruling.

What factors could help the price recover?

An evolving economic landscape

The shifting economy this year has impacted Lloyds in several ways. The initial rise in interest rates boosted its margins, helping it generate income from its core lending business. But with rates now falling, things are changing.

However, interest rates are a double-edged sword: while high rates improve loan margins, they also drive fierce competition in the savings market. This can force banks to offer higher rates to retain deposits. 

For the most part, Lloyds maintained its market leadership in mortgages and adopted a conservative stance on asset quality. Moreover, it developed a cautious outlook on impairment charges due to the potential for increased loan defaults.

​Digital to the rescue

As new online banks across Europe curry favour with younger consumers, traditional banks need to adapt to keep up. To meet this demand, Lloyds is investing £3bn into a digital transformation. 

However, it’s no easy feat adapting legacy systems while meeting customer expectations and competing with fintech start-ups. 

Lloyds has already been improving its online banking and mobile apps for several years. It’s also initiated new projects with ServiceNow, Microsoft and Google Cloud to improve HR functions and customer services.

Most recently, it partnered with Cleareye.ai to reduce overheads using AI-powered automation in trading and compliance.

The initial investment is high but is aimed at reducing costs significantly in the future. Whether it’s enough to counter the costs of the financing probe remains to be seen.

Financial situation

The share price has already begun to recover from last week’s fall, exhibiting Lloyds’ resilience. However, it may struggle to match the growth it enjoyed in the first half of the year.

In the latest Q3 results, earnings per share (EPS) missed analyst expectations by 19% and net income was down 1.7% compared to Q3 last year.

Total assets grew to £900bn while debt decreased to £81.6bn.

It projects a gradual return on tangible equity (RoTE) of around 13% for 2024, aiming for higher efficiency and cost control in the coming years.

The car financing probe has cast a shadow over Lloyds throughout 2024. However, the most recent ruling regarding ‘secret’ commission payments was probably the biggest shock. If more details emerge, the share price could suffer further losses.

However, it’s already recovered 3.5% this month and remains up 15% year to date. Considering the bank’s resilience so far and its focus on technological upgrades, I think it could continue to recover from here.