The Lloyds (LSE: LLOY) share price has been on a stellar run in 2025. Shares in the banking group are up 66% to 91.7p as I write on 6 November and sitting just shy of a 52-week high.
Sitting on the sidelines is a difficult thing. I thought I’d dive into why investors might still want to consider, despite the recent share price gains.
What’s happening to the Lloyds share price?
The Lloyds share price has hit a 52‑week high and is one of many banks enjoying recent gains. That’s despite the UK banking sector facing challenges such as increased regulation, economic uncertainty, and margin pressure.
The current valuation is arguably even more impressive as the bank continues to deal with the fallout from its motor finance practices. A favourable Supreme Court ruling reducing compensation payouts to affected customers has provided certainty and ruled a line under the scandal.
More recently, the Bank of England keeping rates on hold at 4% has helped to alleviate some investors’ concerns around net interest income in the medium term.
Valuation
Lloyds has a price-to-book (P/B) ratio of around 1.1. That suggests investors are willing to pay a slight premium over its net assets in the expectations of further growth. It’s a similar story for the likes of HSBC and NatWest, with P/B ratios of 1.2 and 1.1, respectively.
The bank also has a tidy dividend yield of 3.6%, which is roughly in line with the Footsie average. However, HSBC (4.2%) and NatWest (4.1%) both have higher yields, which suggests that investors need to consider what they want out of Lloyds shares in the long run.
Three reasons why investors may consider buying
Firstly, the improving interest rate environment and its impact on net interest income is a real factor. Banks typically do well when rates are higher and they can widen the gap between their deposit rates paid and lending rates received.
Secondly, the strong dividend yield is important. While it isn’t the highest on the market, a solid dividend yield backed by a stable lending book could be a good source of cash income for investors. The bank is also active with share buyback programmes, which can bump returns up even more.
Thirdly, there’s the reduced regulatory risk angle. One major drag on the bank has been its motor finance scandal and uncertainty. The recent news suggests more clarity moving forward, which could further propel its profitability.
My verdict
Lloyds offers a compelling mix of yield, modest valuation, and potential for higher returns, if interest margins improve and the regulatory overhang reduces.
However, there are risks. Regulatory pressures are rife and the outlook for UK loan growth isn’t much to write home about. If earnings fall away and net interest margins narrow, there is certainly risk to the stock.
For investors comfortable with taking on the broader risks of the banking sector, I think it’s worth considering, if they think that interest rates will stabilise and the scandals are behind the bank.
