Lloyds‘ (LSE:LLOY) shares have enjoyed a remarkable resurgence in recent years, with its share price rocketing by over 37% in 2025 alone, building on strong gains in 2024.
This rally has been supported by robust net interest income and a resilient net interest margin of over 3%. A key factor in investors’ optimism has been Lloyds’ effective hedging strategies, which have allowed the bank to lock in higher interest income for future years. This provides a buffer against potential rate cuts and ensuring more predictable earnings.
However, Lloyds remains closely tied to the UK economy. Unlike some larger global rivals, it lacks a significant investment banking arm, making its fortunes especially sensitive to domestic economic trends and consumer credit cycles.
This focus has helped Lloyds maintain a clear business model, but it also means the bank’s exposed to any downturn in the UK market.
Is Lloyds still good value?
I believe the FTSE 100 banks largely trade in line with each other. However, comparing Lloyds’ forward valuation to smaller peers reveals a slightly different picture.
Lloyds trades at a forward price-to-earnings (P/E) ratio of 11.9 times for 2025, falling to 7.1 times by 2027, with a forecast dividend yield rising from 4.5% to over 6%.
So how does this compare to smaller UK-listed banks?Let’s start with FTSE 250 peer Lion Finance Group. The Georgian bank looks even cheaper, with a 2025 P/E of just 5 times and a similar dividend yield, dropping to a P/E of 3.9 times by 2027.
Arbuthnot Banking Group‘s an even smaller bank. This one’s UK-based and has a long history. It also trades at a discount to Lloyds, with a 2025 P/E of 7.4 times and a yield above 5.5%. This P/E falls below 5.5 times by 2027. It’s not quite as cheap as Lion Finance, but that’s likely a reflection on the relative stability of the UK.
While Lloyds offers a solid yield and a steadily improving payout, investors should be cautious about chasing the lowest P/E ratios. Lion Finance, for example, is based in Georgia, where political and economic risks may justify its cheaper valuation. Similarly, Arbuthnot’s smaller size and niche focus may bring greater volatility.
Ultimately, Lloyds remains a bellwether for the UK economy, offering reliable income and a clear growth path. Yet for value hunters willing to accept higher risk, some smaller banks may offer even greater potential.
The bottom line
Personally, I’m continuing to hold my Lloyds shares, seeing as they’ve almost doubled in value over the past two years. One reason for this is the dividend, which is around 7% relative to my purchase price. I’m also conscious of concentration risk, but I still believe Lloyds should be considered by investors today. I’ve also purchased shares in Arbuthnot recently, noting its discount to larger peers.
