Lloyds’ (LSE:LLOY) shares have skyrocketed over the past 12 months, but the longer-term story’s less positive. The banking stock’s up just 10% over five years. That takes us back to February 2020, the month before the first Covid lockdown in the UK.
As such, £10,000 invested in Lloyds shares would be worth £11,000 today. However, this figure does include around £1,500 that would have been received in the form of dividends during the period.
This isn’t a great return, but it’s still stronger than the returns that Britons would have received if they left their money in a savings account. However, it certainly would have required some conviction to remain invested as the stock tanked during the pandemic and a various other points over the last five years.
What’s been going on?
Lloyds shares have experienced a tumultuous journey over the past half-decade. The pandemic in 2020 caused a significant downturn, with the bank’s profits plummeting and dividends suspended. As the economy recovered, Lloyds’ share price began to rebound, benefiting from rising interest rates which boosted its net interest margins.
However, these higher rates proved to be a double-edged sword, potentially dampening demand for mortgages and increasing the risk of loan defaults.
By early 2025, Lloyds shares had shown remarkable recovery, with a 53% increase over the previous year. Despite this growth, concerns about economic uncertainty, potential interest rate cuts, and the impact of motor finance litigation have created volatility in the share price.
The bank’s performance remains closely tied to the UK’s economic health, with investors closely watching for signs of stagflation and changes in monetary policy.
Things are certainly looking up
Lloyds is well-positioned to benefit from the current macroeconomic situation. With a soft landing scenario unfolding, the bank can expect reduced pressure on loan defaults, improving its credit risk profile. As interest rates begin to fall, Lloyds stands to gain from a resurgence in loan demand, particularly in mortgages where it holds a dominant market position.
The bank’s strategic hedging approach is likely to provide a windfall, potentially offsetting any contraction in net interest margins. Furthermore, lower rates could stimulate business lending, diversifying Lloyds’ loan portfolio. The combination of these factors suggests a positive outlook for Lloyds, with potential for improved profitability and growth in the coming years.
However, there are some risks to the thesis. Lloyds is facing increased competition in the mortgage market where it has traditionally been dominant and the UK economy certainly isn’t growing that quickly. For context, the Goldilocks scenario would probably see interest rates sit between 2.5% and 3.5% and UK economic growth — under the best realistic scenario — around 2-2.5%. These growth figures, for now at least, look farfetched.
Personally, I’d consider buying more Lloyds shares for the long run, largely because its valuation metrics, including the forward price-to-earnings ratios, are below sector averages. However, the motor finance case may deliver near-term volatility, and this stock’s already well-represented within my portfolio.
