Lloyds (LSE:LLOY) shares have been in electrifying form lately. Despite recent volatility, the FTSE 100 bank has more than doubled in value in just two years. Add in a steady stream of juicy dividends, and investors over the period have been laughing.
But the risks facing Lloyds have risen significantly since the start of 2026. And I’m fearing its share price could be overdue a correction, especially when taking into account its enormous valuation (more on this later).
So what do City analysts think? With 18 of them currently rating Lloyds shares, there’s some real difference in opinion. One broker thinks the bank will surge 25% over the next year, to 131p. Another reckons it’ll slump 13%, to 91p.
Tough task
So who’s likely to be right? The truth is that predicting near-term share price movements with any degree of accuracy is tough work. So I won’t be making my own prediction here.
The task is even more tough given ongoing uncertainty in the Middle East. The start of the war in February saw Lloyds and other major banking shares slide, the market pricing in the impact of surging oil prices on economic growth and inflation. It’s a scenario where revenues could slump and impairments rise, especially if interest rates are hiked, hitting the housing market and crucially mortgage demand.
Fortunately, the recent ceasefire in Iran and Lebanon cooled these fears. So did the reopening of the Strait of Hormuz, cooling oil prices. Lloyds’ share price predictably rallied on the news, and may pick up speed if peace holds as we all hope. But the Middle East situation remains fluid as the weekend’s development showed, so any upswing could prove temporary.
Are Lloyds shares a possible buy?
The truth is, I buy stocks based on how I expect them to behave over the long term. Whether the share price will rise or fall over a year, or what dividends it will pay in the near term, are secondary considerations.
Now, Lloyds is never going to be the most exciting growth stock in town. It operates in the extremely mature UK banking sector, and in a region with pretty mediocre economic growth. But this doesn’t necessarily make this banking stock unappealing. Its leading position in a largely stable market provides reliable cash flows, cementing its position as a dividend stock. Today its dividend yield is a FTSE-beating 4.1%.
The problem is that long-term risks are growing as challenger banks ramp up their operations. Will Lloyds’ earnings and cash flows remain as robust as these newer banks ramp up their operations? Revenues and margins could come under sustained pressure, and investment in its digital platform and processes may remain elevated as customer expectations rise.
Final word
Lloyds is currently one of the FTSE 100’s most expensive banking shares. When you consider its limited growth prospects versus emerging market specialists like HSBC and Lion Finance, and the severe competitive dangers it faces, I find its huge valuation tough to justify.
At 104.8p per share, its price-to-book (P/B) ratio is 1.5, towering above the 10-year average of 0.9. At this level, I’d rather find other cheaper banks with hotter profits expectations to buy for my portfolio.
