Since September 2024, Lloyds Banking Group (LSE:LLOY) shares have risen in value by 36%. Looking back further, it’s a similar story. Compared to 22 February 2023 — when the bank published its 2022 results — its share price is now 52% higher.
At the time, its market cap was £34.5bn. Today (3 September), it’s valued at £46.7bn. But this is ‘only’ an increase of 35%. How can the share price have increased by more than the bank’s stock market valuation?
The answer is that over this period, Lloyds has been buying its own shares. A look at the last three annual reports reveals that — from 2022 to 2024 — the number of shares in issue fell by 14.7%. During this time, it’s spent £6bn on its own stock. It’s also part-way through another buyback programme worth £1.7bn.
On the face of it, this seems like a good use of cash. The alternative – to increase its dividend – would have benefitted shareholders far less than the capital appreciation they have enjoyed.
| Ordinary shares | 2022 | 2023 | 2024 | All |
| At 1 January | 71,022,593,135 | 67,287,852,204 | 63,569,225,662 | 71,022,593,135 |
| Issued to employees | 793,990,660 | 667,636,165 | 734,265,017 | 2,195,891,842 |
| Share buybacks | (4,528,731,591) | (4,386,262,707) | (3,686,477,708) | (12,601,472,006) |
| At 31 December | 67,287,852,204 | 63,569,225,662 | 60,617,012,971 | 60,617,012,971 |
Then and now
But the bank’s performance hasn’t improved by as much as the increase in its share price might suggest.
In 2022, it reported net interest income of £12.92bn and a profit after tax (PAT) of £3.92bn. For 2024, these figures were £12.28bn and £4.48bn, respectively. Little change is expected in 2025 — the consensus of analysts is for a PAT of £4.38bn.
If this year’s forecast is correct, the bank’s earnings will have improved by less than 12% in four years. This doesn’t appear to justify the recent share price rally, which now means the stock trades on 12.5 times historical profit.
However, looking ahead, post-tax earnings are expected to be £5.89bn in 2026 and £6.66bn in 2027. And despite most economists forecasting that the base rate will fall over the next couple of years, the consensus is for Lloyds’ net interest margin to improve – 3.07% (2025), 3.26% (2026) and 3.37% (2027).
Also, with more buybacks anticipated, earnings per share are forecast to rise by 73% from 6.4p in 2025 to 11.1p in 2027.
Figures like these means the current valuation makes more sense to me. Investors are clearly pricing-in a significant improvement in its bottom line between now and 2027. The forward (2027) price-to-earnings ratio is a much more attractive 7.
Worrying signs
However, I feel these forecasts are a little optimistic. Lloyds does nearly all of its business in the UK, where I see some warning lights flashing on the economic dashboard.
Most worryingly, the 30-year gilt rate – an indicator of bond market confidence — recent recorded a 27-year high. Last October, the chancellor unveiled the largest tax-raising budget in history and yet there’s still a hole in the nation’s finances.
On 31 August, we saw how a windfall tax could impact the sector’s valuations. Lloyds shares fell over 3% following publication of a proposal from a think-tank that would raise £8bn a year from the industry. Although implementing this idea would give the Chancellor some wriggle-room, it’s still not enough.
A UK economic downturn would be bad for the Lloyds share price. And because I’m becoming increasingly anxious about the country’s prospects, I fear the bank won’t meet analysts’ expectations. Therefore, I don’t want to take a position at the moment.
