The Lloyds (LSE: LLOY) share price has been on a tear in 2025. It’s up 52% year to date, making it the top performer among the UK’s major banks. For long-term holders that’s been a rewarding run, and it hasn’t slowed even after regulators announced a probe into historic car finance deals earlier this month.
The Financial Conduct Authority (FCA) is investigating 30 million loan agreements to check if customers were unfairly charged. Analysts think compensation could total £9bn-£18bn — hefty, but still far short of the £40bn lenders shelled out during the payment protection insurance scandal.
Lloyds’ management, led by CEO Charlie Nunn, reiterated that its provisions for motor finance claims aren’t likely to change, suggesting the potential hit to earnings may already be baked in.
Positive developments
Financing probe aside, the bank continues to post positive developments. It recently extended a strategic partnership with Broadcom, which should boost digital capabilities.
Credit ratings agency S&P Global also upgraded Lloyds from BBB+ to A-, citing stronger earnings and a sturdier capital base. That should make borrowing cheaper and bolster confidence among institutional investors.
There’s one trade-off though.The soaring Lloyds share price has driven the dividend yield below 4% for the first time in years. For income seekers, that makes the stock a little less appealing. I still aim to keep Lloyds in my portfolio, but for dividends, I’ve been looking at other names.
A high-yielding alternative
One bank that’s caught my attention is Investec (LSE: INVP). At 6.35%, it currently offers the highest yield of any bank on the FTSE indices, comfortably covered with a payout ratio of just under 50%. With a market-cap of around £4.5bn, it’s even a candidate for FTSE 100 inclusion in the next reshuffle.
Investec has a strong track record, paying dividends for over two decades with five consecutive years of growth. Its balance sheet looks solid, profitability’s respectable, and although debt’s slightly higher than some rivals, that’s not unusual for an investment bank.
On valuation, the stock trades at a price-to-book (P/B) ratio of 0.98, which suggests it’s fairly priced compared with assets on the balance sheet.
Income potential
I think Investec looks like an intriguing candidate for investors to consider, especially at a time when many larger banks have seen their yields compressed by rising share prices.
Still, investors need to weigh up some risks. The bank’s full-year 2024 results showed that net income slipped due to wider credit loss impairment charges and several one-off costs tied to strategic actions. While revenues remain healthy, bad loans and non-performing assets could eat into profit if conditions deteriorate.
The uncertainty lies in whether these charges are genuinely one-off or a sign of a trend that may repeat. If profit volatility persists, that could affect sentiment and dividend sustainability over time.
But for now, things are looking good – and it appears to be going from strength to strength. The share price may be lagging behind some bigger banks, but valuation and dividend-wise, it’s attractive.
For me, Lloyds remains the star performer of 2025. But in terms of passive income potential, I think it’s worth checking out smaller names like Investec.
