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As I write on 3 September, Lloyds‘ (LSE:LLOY) shares are up 85% over the past two years. They had doubled from where they were on 3 September 2023, but have since pulled back a little reflecting fairly standard market movements.
In short, this means a £10,000 investment made two years ago would now be worth £18,500. That’s a really good return. However, investors would have also received around £1,100 in dividends during the period.
Of course, novice investors need to appreciate that previous performance isn’t indicative of what the stock will do next. Lloyds, like other British banks, has performed really well because of continued strong operating performance combined with a re-rating.
In the stock market, a re-rating refers to a change in the valuation multiple that investors are willing to pay for a company’s shares, without necessarily any immediate change in its earnings.
In this case, we’ve seen Lloyds go from trading around 5 times forward earnings — even less during the Silicon Valley Bank (SVB) fiasco — to around 11.4 times today. This is quite a considerable re-rating, but it reflects increasing confidence in the UK’s financial system and also Lloyds’ capacity to deliver earnings growth throughout the medium term.
What does that growth look like?
According to the forecasts, Lloyds’ earnings are set for moderate growth over the coming years, with EPS rising from £0.069 in 2025 to £0.111 in 2027. Meanwhile, dividends are forecast to follow suit, increasing from 3.54p per share in 2025 to 4.76p in 2027, implying a payout ratio of 43%–51%.
These earnings figures mean that the price-to-earnings (P/E) ratio ‘s expected to decline from 11.4 times in 2025 to 7.1 times in 2027, reflecting slower growth relative to the market price. Remember, these are forward P/E numbers based on the current share price.
Collectively, analysts are positive on the direction of the share price too. Analysts’ consensus now see the stock’s fair value just below 90p, representing a 15% increase from the current share price.
The most bullish analyst has fair value at £1.05, while the most bearish at 48p. Importantly however, there are no Sell ratings.
A risk to bear in mind
Bond yields in the UK are rising, and this means bond prices are falling (they’re inversely correlated). This broadly reflects concerns about the government’s ability to balance the books. Essentially, bond investors are selling UK bonds because they’re worried about the state of our finances.
Banks like Lloyds are exposed to rapid gilt yield rises. That’s because they hold large bond portfolios for liquidity and capital purposes. When yields jump, the market value of these bonds falls, potentially creating unrealised losses.
If customers withdraw deposits or the bank needs to sell bonds to meet liquidity, these losses can crystallise. The SVB collapse illustrated how concentrated bond portfolios combined with funding stress can trigger crises.
While UK banks are generally more diversified, this remains a risk worth bearing in mind. In other words, keep an eye on those yields. Despite this, I believe the stock’s worth considering. The risks are still low and the forecasts are positive.
