Lloyds (LSE:LLOY) shares have started 2026 on the front foot after last year’s epic gains. Up 3% since 1 January, the FTSE 100 stock’s risen almost two-thirds in value on a 12-month basis.
The Black Horse bank has soared for several reasons. It’s continued to report robust income growth and profitability, while net interest margins (NIMs) have benefitted from higher interest rates. Share buybacks and rising dividends have also supercharged investor appetite for the FTSE share.
Lloyds share price has soared, too, on external factors that have boosted the broader London stock market. Namely, it’s risen as global investors have sought out undervalued UK and European shares.
The question is, can the FTSE bank continue to climb?
Growth and dividends
A look at Lloyds’ profit and dividend forecasts could reveal some interesting answers.
City analysts reckon earnings will have risen 7% year on year in 2025. For this year, they’re expecting growth to accelerate to 41%. Slower (but still impressive) growth of 20% is forecast for 2027.
These brilliant forecasts mean brokers anticipate further healthy dividend increases, too. An expected 3.6p per share total payout for last year is tipped to rise to 4.2p in 2026, and again to 4.9p in 2027.
I’m confident Lloyds shares can deliver the large dividends analysts are expecting. Dividends for this year and next are covered 1.9 to 2.2 times by expected earnings. The bank also has a robust balance sheet (its CET1 capital ratio was 13.8% as of September). Both provide a margin of error for dividends if profits get blown off course.
But are those earnings estimates as robust? I’m not so sure. In fact, I think current forecasts leave Lloyds’ share price in danger of a sharp correction.
What could go wrong?
Lloyds does have some positives heading into 2026. With interest rates falling, it could enjoy stronger consumer and business demand across its product lines. The pickup could be especially strong in the mortgages segment, a key area for the business.
Lower interest rates might also lead to sharply lower impairments, giving the bottom line an additional boost. Yet these catalysts don’t (in my view) support the kind of stunning earnings growth forecasts analysts are expecting.
Indeed, the risks to current estimates are enormous, and cast significant doubt over those forecasts. Lower interest rates have some benefits for retail banks, but they also have enormous drawbacks by squeezing margins. With market competition rapidly growing, too, NIMs could come under much more pressure than analysts are currently expecting.
What’s more, it’s tough to see the sort of income jumps some brokers are expecting as the UK economy toils. Weak growth, rising unemployment, and stretched household finances remain significant problems for this year and probably beyond.
Are Lloyds shares a Buy?
Signs that Lloyds is struggling to meet growth forecasts could hit its share price hard. The danger is even higher given the high valuation the stock now commands — its price-to-book (P/B) ratio of 1.5 soars above the long-term average of 0.9. It no longer looks like the bargain it did a year ago.
And so on balance it’s far too risky for me, meaning I won’t be buying Lloyds shares for my portfolio. Having said that, it could still be a great stock for more risk tolerant investors to consider.
