Lloyds‘ (LSE:LLOY) shares have surpassed £1. When I was stocking up on Lloyds’ shares two and three years ago, I didn’t truly believe the stock would push this high. But it has, and I’m delighted. The only issue is whether this valuation’s sustainable and whether it could go higher still.
Let’s explore.
British banks’ dilemma
British and European banks have long traded at a structural discount to their US peers, and that gap persists even after the sector’s recovery. Lloyds trades on roughly 10.4 times forward earnings, while JP Morgan, for example, commands closer to 14.5 times.
Some of that difference is permanent.
US banks benefit from structurally higher returns on equity, deeper capital markets, more diversified fee income and a regulatory framework that, while demanding, has historically been more supportive of scale and profitability.
Of course, banks are cyclical and they reflect the health of the economy. It seems likely that American banks will deliver stronger returns over the long term than British banks, but actually the medium-term forecast suggests the opposite. UK banks are delivering the type of earnings expansion unseen for years.
Why do I mention this? Well, it’s important context. Valuations are always relative to one another. There’s an argument that UK banks could push higher still because their American peers are more expensive, especially on growth-adjusted metrics.
I get that argument, but the sad nature of long-term growth in the UK will inevitably hold British banks back.
Justifying the valuation
FTSE 100 bank Lloyds is expected to grow earnings by 29.9% in FY26. That’s awesome, but it’s not going to be sustainable over the long run. And without an investment arm, it’s going to remain highly dependent on net interest income from its lending business.
That concentration leaves earnings inherently cyclical. Strong profit growth can persist while credit conditions remain benign and margins hold up, but history suggests there’s a ceiling. As the cycle turns, margin pressure and slower loan growth typically follow.
Ultimately, the valuation case depends on how far earnings can rise before that cyclicality reasserts itself.
Better opportunities elsewhere
I remain sceptical about Lloyds’ near-term potential because the outlook’s finely balanced. Much depends on the path of interest rates over the next two-to-three years.
Banks typically perform best in a so-called Goldilocks zone, where policy rates sit around 2.5%-3.5% — high enough to support margins, but not so restrictive that credit demand weakens.
In the current environment, that balance looks fragile. Yes, we’re moving toward the Goldilocks zone, but we could also move through it. And that’s where this valuation justification comes into play. On face value, yes I believe it justifies the £1 per share, but I’m not sure it can appreciate more in the near term.
Personally, I’m wondering whether there are better opportunities outside FTSE 100 banks. I still think Lloyds is a good stock, worth considering for the long run. But explosive near-term growth is off the cards.
