Lloyds (LSE:LLOY) shares are on fire right now. After a perfect storm of higher interest rates, rising profits, and de-risked legal overhangs, the British banking giant has seen its share price surge over 90% in the last 12 months. And after almost 20 years of non-existent growth, the stock is now trading above the £1 share price threshold.
For over a decade, investors have been asking when Lloyds shares will finally rise back above 100p. And in 2026, it has finally happened – a critical psychological pivot point for many investors who’ve long viewed the bank as a zombie stock.
With fresh momentum under its wings, multiple institutional investors have been upgrading their share price targets. Earlier this month, the analysts at Barclays hiked their forecast from 100p to 120p. Meanwhile, the experts at Jefferies issued a similar projection at 119p.
So, with the decade-plus era of stagnant growth seemingly over, are Lloyds’ shares finally worth buying again?
Incoming earnings surge
The bull case surrounding Lloyds is quite complicated. So, let’s break it down.
In oversimplified terms, without protection, UK banks are highly sensitive to changes in interest rates set by the Bank of England. So, to reduce this sensitivity, these financial institutions use something called an interest rate swap to effectively ‘lock in’ current interest rates for several years.
When interest rates rise, the hedges backfire, preventing banks from fully capitalising on the benefit of higher rates. But when interest rates fall, these swaps allow banks to continue enjoying previously higher rates for longer.
Here’s where things get interesting. With an average duration of three-and-a-half years, many structural hedges that Lloyds set up back in 2022 have begun expiring. And they will now be replaced with new hedges. But the critical difference is that interest rates at the start of 2026 sit at 3.75% versus the average 1.5% throughout 2022.
That means even with interest rates falling, Lloyds’ lending margins could still get bigger this year. So much so that Barclays’ analysts have forecast a jaw-dropping 70% growth in earnings per share by 2028.
What to watch
Needless to say, growing profits by 70% over the next three years is an impressive feat. And with that in mind, Lloyds sounds like a screaming buy.
However, it’s important to remember that this is just a forecast. And some critical risk factors could prevent it from happening.
As a result of US tariffs, Chinese manufacturers have begun diverting goods to the UK. Alan Taylor, a member of the Monetary Policy Committee at the Bank of England has highlighted that these cheap exports could help reduce inflation, paving the way for faster interest rate cuts.
Here’s the problem. If interest rates are lowered faster than Lloyds can renew its structural hedges, then current forecasts could be overestimating the bank’s margin expansion capabilities. And consequently, Lloyds may miss analyst earnings targets, putting downward pressure on its shares.
The bottom line
2026 looks like a year of potentially terrific opportunities for Lloyds shares. While the bank is unlikely to deliver another 90% return in the next 12 months, the bull case is nonetheless compelling for investors seeking exposure to the banking sector.
That’s why, even with the risks, I think this UK stock deserves a closer look.
