Lloyds‘ (LSE:LLOY) shares have more than doubled in value over the past two years. That makes it one of the strongest performers on the FTSE 100 and it’s got momentum that many investors will find hard to ignore.
However, the important question is whether the stock still represents good value? The short answer is: it’s not a bargain anymore.
Cyclicality and the margin of safety
Today, Lloyds is trading around 13.3 times forward earnings (FY2025), but that falls to 10.3 times for FY2026.
The first thing that stands out is the difference between that 2025 and 2026 figure. This tells us that earnings are growing. In fact, analysts are forecasting 29.9% earnings growth in 2026.
While this earnings growth figure’s really strong, it’s important to recognise that this isn’t sustainable long term. Banks are notoriously cyclical and reflect the health of the economy.
That raises the risk that today’s estimates may reflect something close to peak earnings (in this cycle), driven by high interest margins and unusually benign credit conditions. If the economic backdrop weakens or rates fall, profitability could deteriorate quickly, making the current valuation look less compelling than it first appears.
This is where margin of safety becomes an issue.
Not so cheap
Of course, 10.3 times forward earnings isn’t particularly expensive compared with the rest of the index or especially tech stocks. This is why valuations are always contextual. I’d suggest it roughly trades in line with its peers.
One useful piece of content is the historic valuation. Three years ago, the bank was trading at 6.7 times forward earnings but forecasts (incorrectly) assumed no earnings growth — largely due to concerns about impairment charges during the cost-of-living crisis.
The dividend yield was up at 4.9% versus 3.3% today. The price-to-book ratio was 0.67 versus 1.29 currently.
The obvious point here is that, on face value, it’s not as cheap as it used to be. But it may be cheaper today on a growth adjusted perspective. It all depends on how Lloyds can keep growing earnings in this cycle.
Missing out on a ‘mega-IPO’ wave
Lloyds derives the vast majority of its earnings from lending. The company famously lacks an investment banking arm, having stripped back to its UK retail core after the financial crisis. That means it will likely miss out on a potential “super-cycle” for book runners.
Easing interest rates and a private equity backlog have finally triggered the “mega-IPO” wave. Global giants are racing for listings with SpaceX targeting a $1.5trn valuation, OpenAI’s eyeing $1trn to fund its massive compute needs, and Revolut’s pursuing a blockbuster $75bn fintech debut.
For investment banks like Goldman Sachs or Barclays, 2026 is a fee-printing bonanza.
The bottom line
It may sounds like I’m being a little downbeat on Lloyds, but that’s not the case. I still believe it’s worth considering for a long-term investment. However, given the inherently cyclical nature of banking, some caution is warranted.
