Since October 2024, the Lloyds Banking Group (LSE:LLOY) share price has soared 44%. This impressive rally puts it in the top 20% of FTSE 100 performers over the past 12 months.
But if one analyst is right, there’s still more to come. In August, Jefferies set a new one-year price target of 103p. If this valuation proves to be accurate, it means anyone investing today (2 October) could see £10,000 grow to £12,262.
In addition, if the analysts’ consensus forecasts are right, the bank could pay a dividend of 3.5p during the coming year. This would generate another £416 giving an overall gain of 26.8%.
That’s an attractive prospect. After all, the most that can be earned on one of the bank’s fixed-rate savings accounts is currently 3.45%.
A domestic focus
But I think the bank’s heavily reliance on the UK economy makes a three-figure share price unlikely. With growth slowing and inflation remaining above the Bank of England’s 2% target, it could mean interest rates stay higher for longer.
On paper, a tight monetary policy is good for banks. Higher interest rates are likely to help Lloyds’ net interest margin (NIM) — the difference between the amount earned on its loans and that paid on customer deposits, expressed as a percentage of interest-bearing assets.
In 2024, its NIM was 2.95%. Analysts are expecting this to increase over the next three years to 3.07% (2025), 3.26% (2026) and 3.37% (2027).
On the other hand…
But the flip side is that higher borrowing costs could see an increase in loan defaults. In 2024, the bank recorded an impairment charge of £433m. This comprises the actual cost of bad loans as well as an estimate of potential losses. This was equal to 6.4% of its pre-impairment profit. Analysts are predicting this will increase to £1.38bn by 2027 — 12.9% of earnings.
By comparison, its 2020 charge was £4.2bn. Don’t get me wrong, I’m not predicting the sluggish UK economy will deteriorate to such an extent it did at the height of the pandemic. But I’m becoming increasingly nervous.
Most FTSE 100 companies have an international footprint to help spread the risk of a downturn. Not Lloyds. And to help fill a hole in the nation’s finances, I suspect the Chancellor might impose a windfall tax on the country’s banks. Politically, they’re an easy target.
Final thoughts
However, analysts are more optimistic than me. Despite expecting an increase in bad loans, they’re forecasting earnings per share to be 76% higher in 2027 than in 2024. In part, this is helped by anticipated share buybacks of around £7.3bn. But they’re also predicting Lloyds post-tax profit will rise by 49%.
If it can achieve figures like these I see no reason why the bank’s share price couldn’t break through the 100p barrier. But I have a hunch that the ‘experts’ are being too positive.
Of the FTSE 100’s five banks, Lloyds shares are currently the most expensive. They’re changing hands for 13 times its forecast 2025 earnings. It seems to me that some of the analysts’ optimism is already priced into the bank’s share price. Any wobble in the economy and there could be a sharp correction. On this basis, the stock’s not for me.
