The Lloyds Banking Group (LSE: LLOY) share price barely moved Thursday morning (29 January), despite the bank reporting annual profits ahead of expectations. Reported profit before tax in 2025 hit £6.7bn — up from £6.0bn the previous year, and nicely ahead of the £6.4bn analysts had been expecting.
Total income gained 8% to reach £19.4bn — though that was offset a little by higher operating costs and impairments. And in a year when interest rates started to come under pressure, Lloyds saw underlying net interest income rise 6% to £13.6bn.
On top of that, the bank launched a new share buyback programme of up to £1.75bn. In the words of CEO Charlie Nunn, it means “total shareholder distributions of c.£3.9 billion for the year“. If that isn’t enough to give the shares a boost, I don’t know what is.
Maybe an upgrade to guidance should be enough to push the price up a bit? The board now expects 2026 to see underlying net interest income jump to around £14.9bn. And that’s in a year when shareholders have been fearing falling interest rates might put a dent in Lloyds’ profits.
But no, that wasn’t enough to enthuse the market. Nor was the new expectation for a Return on Tangible Equity (ROTE) of more than 16%. And even a plan to pay down Lloyds’ Common Equity Tier 1 (CET1) ratio to around 13% didn’t move the market.
Pay down to? That’s after years of so many banks working hard to get their CET1 up to that kind of level. At the end of 2019, before the pandemic sent bank shares tumbling, the UK bank average was around 12% and considered healthy.
Out of steam?
Maybe I shouldn’t be surprised at the cool market reaction to what looks like a great set of figures. After all, the Lloyds share price has climbed 66% in the past 12 months. And it’s more than trebled over five years. When a stock has climbed this far in such a short time (by long-term investing standards), it can take something exceptionally special to move investors further.
I expect a number of shareholders will have been cashing out and pocketing some profits too. And valuation’s the other big thing. These latest results give us a price-to-earnings (P/E) ratio of 15. And the full-year dividend of 3.65p per share means a modest yield of just 3.5%. The economy’s still shaky. And when Bank of England rates come down to a longer-term level, that could pose questions for Lloyds interest income.
Does this all suggest Lloyds shares are maybe getting a bit overheated now? Looking at earnings growth forecasts — which would drop the P/E down to 9.3 again by 2027 — I don’t think so. But right now I think I’d rate Lloyds as fair value.
Hold for me
Lloyds remains a firm hold for me. And I think investors who are positive about the long-term future for the UK’s banks should consider it. But I can see the attraction of bigger dividend yields in the financial sector — like Legal & General‘s forecast 8.1%
