Lloyds Banking Group (LSE:LLOY) shares have been on an incredible rally in recent years. Over the past year alone, the Lloyds’ share price is up 70%. At the highest level in over a decade, investors have been cheering it all the way. However, I have growing concerns about why this can’t be sustained forever. Let me explain.
Lower net interest margin
The Bank of England committee is likely to cut interest rates at the meeting on Thursday (18 December). More than that, it’s likely we’ll see at least two more rate reductions in 2026. This is a negative for Lloyds’ share price. The lower the base rate, the smaller the net interest margin is. This refers to the difference between the rate that Lloyds pays on deposits and the rate it charges on loans. The lower the central bank’s interest rate, the smaller the spread that Lloyds can earn.
As a result, I see pressure on net interest income in 2026. It’s true that the impact is somewhat delayed and won’t be felt immediately. But the trend of lower rates over the coming year will be difficult to ignore completely.
Consumer tightness
Lloyds has the largest UK retail base among the major high street banks. During good times, this is something to boast about. This is reflected in higher demand for financial products, investments, mortgages and more. Higher transactional spending means more fees for the bank.
Yet the opposite’s also true. I think next year could be a tough one for the UK economy. With people concerned about tax changes and lower economic growth, they could cut back on spending. More than this, people could defer significant spending commitments, such as buying a house. The bottom line could be lower revenue for Lloyds, which could take the hit more than peers with a more diversified client base.
Valuation attraction
Despite these concerns, some will flag that the bank could still be cheap. With a price-to-earnings ratio of 14.88, it’s below the FTSE 100 average of 18.2. Using this logic, it could be argued that the share price can keep rising, as it might not be overvalued.
Further, the dividend has been hiked for the past few years, with 2026 potentially offering an even higher dividend per share. With a current dividend yield of 3.33%, even a modest decline in the stock could push it higher, prompting income investors to step in and buy. As a result, any fall might just be a dip worth buying.
Even with these thoughts, I still believe the bank will struggle next year to keep this share price rally going. As a result, I think there are more compelling investment options in the FTSE 100 for investors to consider right now.
