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The Lloyds Banking Group (LSE: LLOY) share price has soared more than 50% year to date. Often when I see that happen, I’m looking for possible overvaluation and thinking whether it’s time to sell.
And when it tops off a five-year spell that’s seen the shares treble in value, I do start to get a bit nervous.
It’s tempting to look even further back, and realise that UK bank stocks are still way down on where they were before the 2008 financial crisis. In 2007, Lloyds shares reached over 400p. And we might even think we could still have far more share price growth to come to get back to those levels.
But we’ve also had Brexit since then, and the UK’s no longer the banking centre of Europe. The industry will surely never again be what it was in those days. We need to forget the past and look only to the future.
What next?
That means forecasts. And the City outlook puts Lloyds shares on a price-to-earnings (P/E) ratio above 12 for the 2025 year. Is that a bit high? With current economic uncertainty, and our inflation and interest rate future looking precarious, I think it might be. It’s still below the FTSE 100 long-term average, but I don’t see much safety margin.
With the forecast dividend yield down to 4%, and with the FTSE 100 offering some considerably more attractive options, I might consider selling and looking for better value.
Except… forecasts show Lloyds earnings per share climbing nearly 80% between 2024 and 2027. And that could drop the 2027 P/E as low as 7.5 again. There should be plenty of safety in that, I think, if it comes off.
Lloyds’ current valuation is loftier than high street rivals Barclays and NatWest Group, on forward P/Es of 9.0 and 9.4 respectively. Analysts expect a slightly better dividend yield from NatWest at 4.4%, though Barclays offers only 2.3%. NatWest looks possibly the best banking value to me at the moment — even though its price is up 245% in five years.
Tight focus
My biggest concern for Lloyds is its heavy reliance on the UK mortgage market. In the long term, I think that could actually be a strength. The UK will, it seems, always be short of homes and there’s surely strong long-term demand. So I see mortgage lending as a strongly profitable long-term business. But I also rate it a source of short-term risk.
On balance, Lloyds is still a firm hold for me — not based on today’s valuation, but on future prospects. And with that view, I’m even considering buying more — if I don’t go for NatWest instead.
So what about that 50% surge? It’s been boosted by the car loan decision and the optimism it generated. And though I hate to make share price predictions, I can’t see it continuing at that pace for long.
I’ll be happy to see steady, if conservative, share price progress. Especially if forecasts for the dividend yield rising to 5.7% by 2027 (on today’s price) turn out right.
