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The Lloyds (LSE:LLOY) share price is red hot. I’ve been very bullish on Lloyds for some time, but its rise has surpassed my expectations. Yes, it offers great earnings growth over the coming years — that’s what the forecasts say, anyway — but it’s quite richly valued at this time.
It now trades at 12.5 times expected earnings for 2025 and 9.7 times projected earnings for 2026. At points three years ago, it traded below half of these figures.
Lloyds remains an interesting investment opportunity, and I believe investors should give it their consideration. However, from a valuation perspective, I believe investors may find better value elsewhere.
So, what stocks constitute better value?
Arbuthnot
This first is one I’ve spoken about several times before. It’s private bank Arbuthnot (LSE:ARBB). The appeal lies in its valuation. It trades at 8.1 times forward earnings and this is forecast to fall to 6.8 times in 2026.
This suggests that there’s room for a re-rating. This is when the market changes its opinion on a company, causing its price multiple, like the price-to-earnings (P/E) ratio, to change significantly without a corresponding change in the company’s actual earnings.
What’s more, its dividend yield is actually stronger than Lloyds by some distance. The forward dividend yield is expected to sit at 5.9% before rising to 6.4% in 2026. In other words, a £10,000 investment today could deliver more than £1,200 in dividends over the next two years.
Concerns centre around two things. Firstly, the spread between the buying and selling price. With a £10,000 investment, an investor could be down £350 before they’ve even owned the stock for five minutes.
The second is the size. It’s much smaller and therefore there’s concern about the bank’s liquidity or ability to cope in a crisis. I do think this could be overdone. It’s deposit-to-loan ratio is also very conservative.
Private banking could also be an interesting growth industry. Arbuthnot’s Bristol office has been open less than a decade but the balance sheet could top £1bn in the coming years. That’s just one office.
In short, it’s certainly worth pondering.
Paragon
Who’s next? Paragon (LSE:PAG) is another smaller bank, this time known for its focus on specialist mortgages, consumer loans, and buy-to-let (BTL) lending. It’s built a reputation for being a fairly dependable dividend player, and dividend payments have really surged in recent years.
Shares have come off their highs in recent months and that’s made the valuation look rather appealing. It now trades at 7.6 times forward earnings, set to fall to 7.1 times in 2026, according to the forecasts.
Meanwhile the dividend yield sits at 5.4%, rising to 5.8% in 2026. Both strong numbers and considerably above Lloyds.
On the qualitative side, credit-rating agency Fitch Ratings highlights its “consistently strong asset quality … pricing power within its specialist BTL niche”.
However, there are risks. Its reliance on the BTL and commercial property books leaves it vulnerable to changes in regulation, taxation, interest rates, and landlord sentiment. And let’s face it, the Chancellor isn’t easy to second guess at the moment.
All considered, I certainly believe this is one for the watchlist.
