I remember writing some analysis in November 2023, asking whether the Lloyds (LSE:LLOY) share price would hit 80p any time soon — it was around 40p at the time. I suggested it was entirely possible given the bank’s valuation multiples but accepted that the broader macroeconomic climate and investing sentiment would need to change. Eventually, it all fell into place. UK banks were massively oversold at the time and the macroeconomic situation certainly didn’t help.
The next milestone
As I write (27 May), Lloyds shares trade just below 80p per share, but its 52-week high is just shy of 81p. The stock is up 39.5% over 12 months and now trades at 11.9 times forward earnings. It was around half that two years ago. With this in mind, the next milestone could be £1. The stock hasn’t traded that high since the global financial crisis. That’s almost 20 years ago now.
So, is £1 on the cards this year? Well, personally I think it’s unlikely. At 11.9 times forward earnings, the stock is actually trading pretty close to its US peers. US banks typically trade at much higher earnings multiples. What’s more, it’s more expensive than almost all of its UK peers.
Of course, that 11.9 times figure is a little misleading. Analysts expect earnings to take a little hit this year — likely due to the motor finance issue. The bank had previously said it set aside £1.2bn for potential fines and compensation.
Looking beyond 2025, Lloyds’s earnings are expected to recover. And this means it’s now trading at 8.6 times expected earnings for 2026 and 7.1 times earnings for 2027. Those numbers are more aligned with UK peers.
Variables
As always, there are variables. The stock appears appropriately valued given the earnings expectations and the market’s sentiment towards UK banks at this moment. However, if Lloyds starts outperforming operationally or raises guidance, the stock could push upwards. Likewise, if it misses expectations over the coming quarters, £1 a share could start to look like a pipe dream.
It’s also important to remember that banks typically reflect the health of the domestic economy. And this is particularly true for Lloyds. As it has no investment arm, its performance is heavily linked with the performance of the economy.
This close correlation means that Lloyds is more exposed to economic downturns or periods of stagnation. When growth slows, or if there are shocks such as rising unemployment or falling house prices, Lloyds’s revenues and profits can come under pressure more quickly than banks with more diversified operations.
Current forecasts for the UK economy, however, are relatively positive. A slowly expanding economy coupled with a steady decline in interest rates towards the so-called Goldilocks Zone — somewhere between 2% and 3.5% — is conducive to strong operational performance.
Personally, I’m unlikely to add to my positions in Lloyds at this time. That’s primarily due to concentration risk.
