Lloyds (LSE: LLOY) shares finally broke above the 100p mark just over a month ago, sending waves of optimism through the UK market. The bank not only survived last year’s motor financing probe but has consistently shrugged off looming interest rate cut fears.
Yet despite all that, it now looks likely to lose the key level. A January rally sent the price surging 14%, eventually peaking at 112p in early February. But it has since fallen 9% and is barely hovering above 100p (as of 10 February).
Could this signal the end of a spectacular two-year-long rally that’s helped the price rise 147%?
Reasons to remain positive
The rally above 100p in early January was the first time Lloyds shares cracked the level since the 2008 crisis. But it might not be as short-lived as it looks — strong fundamentals support the thesis for further growth. The bank upgraded its 2026 outlook with net interest income targeting £14.9bn, a cost-income ratio under 50%, and return on tangible equity over 16%.
All this is backed by a robust CET1 ratio of 13.2%, a key regulatory measure of a bank’s core financial strength. Anything below 10% is considered risky.
Plus, many brokers still seem positive, with Jefferies raising its price target to 119p. It highlighted the bank’s ‘considerable scope’ for valuation expansion, driven by structural hedges against rate falls and attractive dividends yielding around 3.6%.
After the Bank of England narrowly voted to hold rates at 3.75% earlier this month, Lloyds took a sharp dip. The close call means it’s now more likely that rates will be cut in the next meeting. Still, the bank’s domestic focus positions it well for a recovering UK economy with 1.4% GDP growth forecast.
Key risks to watch
That said, the 9% drop since the peak isn’t without reason. Shore Capital’s recent downgrade to Sell with a 91p target highlights overvaluation concerns after the rally. Investors should be aware that net interest margins may narrow if further rate cuts materialise.
Meanwhile, economic issues like rising unemployment or loan impairments pose additional risks. Given Lloyds’ heavy UK exposure, this is especially relevant for the bank. Heightened competition in deposits and subdued lending growth continue to put pressure on the bank’s profits.
Long-term appeal
Despite the recent troubles, Lloyds remains a solid hold for long-term investors to consider. If nothing else, it’s passed the test of time, with consistent capital generation over 200 basis points. Moreover, its new strategy, dubbed ‘Helping Britain Prosper’, signals resilience beyond 2026.
So with the price still hovering above 100p, this pullback could be an opportunity to invest in a bank that’s transformed since 2021, offering yields and growth that outpace the FTSE 100 average. For middle-aged investors building passive income, Lloyds is still fits the bill well.
As always, it’s critical to maintain a highly-diversified portfolio to reduce risk and manage volatility. Including a few retail and healthcare stocks can add defensiveness, while popular growth stocks like Rolls-Royce help to keep things climbing.
