Lloyds Banking Group (LSE: LLOY) has been on a tear. Up more than 50% year-to-date, the shares are trading at levels last seen a decade ago. Analysts are lining up with upgrades, senior executives are buying stock with their own money, and the City is whispering about more upside to come.
The signs are encouraging. Charlie Nunn and William Chalmers buying shares around 76p tells you something significant – the people who know this business best believe the market has got it wrong. Throw in the recent wave of analyst upgrades and a net interest margin that’s finally turning the corner, and you’ve got a pretty strong bull case for Lloyds.
But are we in danger of getting carried away?
At around 84p, Lloyds trades on a forward price-to-earnings multiple above 12 for 2025. That’s hardly outrageous, but it is loftier than rivals like Barclays and NatWest, which sit closer to single-digit multiples. For a bank whose fortunes are tightly bound to the UK housing market, that premium could be argued both ways: a sign of confidence in Lloyds’ dominant mortgage franchise, or a warning light that investors are paying up for a business with plenty of domestic risk.
The mortgage market is a double-edged sword. Long-term demand for housing in the UK is undeniable, but in the short run Lloyds remains hostage to interest rates, house prices, and consumer confidence. If the Bank of England cuts slower than expected, or if the UK economy stumbles, that 2.9% forecast margin may prove difficult to sustain.
Then there’s the shadow of motor finance. The recent Supreme Court ruling narrowed the scope of potential claims, handing Lloyds and other lenders a huge relief rally. Yet the FCA’s upcoming redress scheme could still leave banks facing multibillion-pound payouts. Lloyds insists its £1.2 billion provision is adequate, but that remains to be seen.
All that said, Lloyds today is in a stronger position than it has been for years. Return on tangible equity is holding up, provisions are manageable, and the buyback programme signals management confidence. Forecasts suggest earnings per share could rise nearly 80% between 2024 and 2027, which, if achieved, would drag the valuation back into bargain territory.
So where does that leave investors? Lloyds looks neither dangerously overpriced nor screamingly cheap. It’s a bank whose fundamentals are clearly improving, but one still wrestling with legacy risks and a dependence on the UK economy.
The provocation is this: do we view Lloyds as a steady income play with room for gradual revaluation, or are we simply repeating a familiar cycle, piling into a bank at decade highs, only to watch sentiment turn when the next headwind arrives?
For now, Lloyds is a firm “hold” in my book. If the optimistic earnings forecasts come through, the valuation could start to look more attractive. But I’d treat that with caution, because for all the analyst upgrades and executive confidence, the investment case remains tightly bound to the twists of the UK economy.
Disclaimer: This communication is intended for information purposes only and should not be considered investment advice. The value of your investment may rise or fall and your capital is at risk. Please do your own research or consult a regulated financial adviser before making any investment decisions.