Lloyds (LSE: LLOY) shares got off to a flier in 2026. The share price was up 14% by early February. The brilliant start to the year has, however, been curtailed after a raft of geopolitical shocks. Here are three key factors in what is shaping up to be an important time for the Black Horse bank:
- 1) Interest rates – now that markets are pricing in a rate hike (as opposed to a cut or two), what is the impact on Lloyds’ operations?
- 2) Artificial intelligence – will the threats of AI to the ‘knowledge economy’ have severe knock-on effects for the bank?
- 3) Dividend yield – what could investors be looking at in terms of shareholders returns over the next year or two?
Let’s take a look at each issue in turn – then I’ll give my verdict on whether I think Lloyds could be a buy today.
A boost
The change in direction for interest rates has come as a shock to the markets. The expectation was a rate cut or three this year, down to perhaps 3%. Now that the Iran war has got inflation rearing its ugly head again, the current expectation is for one rate hike.
Higher interest rates is one reason for the success of banks in recent years because a bigger percentage means more room for a bigger margin. This does pose the potential problem of a possible windfall tax for Lloyds and other banks if profits stay high, but overall, these higher borrowing costs should give a boost to the shares.
The second point of artificial intelligence is a thorny one. The problem is that many knowledge economy jobs could be replaced by AI. There are growing worries that this could create a major problem for Lloyds in the form of mortgage defaults.
As the country’s largest mortgage lender, the bank may feel the pinch if folks can’t pay their mortgages because their jobs are being done by ChatGPT. We’ve already seen how stocks that looked impervious to AI at first can take a fall as the technology advances (see the huge losses for stocks like RELX or London Stock Exchange Group in the last year).
A buy?
As for the dividend, a forecast yield of 4.36% looks somewhat unimpressive on the surface. After all, savings accounts are paying thereabouts at the moment. Why should those looking for income take the risk?
Well, there has been a shift in many FTSE 100 stocks in recent years to use cash on share buybacks instead of or as well as dividends. Lloyds is currently spending £1.75bn, which could boost the share price rather than pay the money directly. Looking at it this way, the bank is paying well over 7% in total shareholder returns – a much more attractive figure.
On balance? I think there’s plenty to like here. With the shares down 14% from a recent high, I think this might be one for investors to consider.
