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Like many other FTSE 100 stocks, 2025’s been a truly terrific year for Lloyds (LSE:LLOY) shares after them treading water for some time.
The leading UK banking stock has seen its market-cap expand by over 62% since January, driven by a combination of factors.
This includes:
- Impressive net interest margins as the bank capitalises on higher interest rates to bolster lending profitability
- Legal clarity regarding the ongoing motor financing mis-selling scandal courtesy of the UK Supreme Court
- Improved free cash flow generation supporting a higher return on tangible equity (RoTE) of 14.6% (excluding motor financing charges), ahead of analyst expectations
The result of all this is that anyone who invested £5,000 at the start of the year now has close to £8,100. And those who reinvested the dividends paid along the way have done even better with around £8,300. But can Lloyds shares do the same again in 2026?
What’s on the horizon?
Despite having achieved substantial growth in 2025, the consensus from expert analyst forecasts remains very bullish. The team at Jefferies has placed a 115p share price target by this time next year. And Shore Capital is also anticipating more growth up to 110p.
Comparing these projections against the group’s current share price suggests another 28% capital gain could be unlocked over the next 12 months. And when combined with the bank stock’s 3.8% dividend yield, a new £5,000 investment today could reach £6,590 by this time next year.
We’ve already discussed what’s driving this optimism: improved legal clarity and wider profit margins.
If Shore Capital’s correct, dividends may also be set to enjoy its sixth consecutive year of payout increases. And while the Bank of England has begun cutting interest rates, putting pressure on margins, Lloyds’ hedging activities mean it could continue to benefit from elevated lending margins until 2027.
However, even with this exciting outlook, there are nevertheless still several key risks to watch closely moving forward.
Risk vs reward
With Lloyds joined at the hip to the UK economy, its impressive progress may ultimately be undone if the latter isn’t able to bounce back. After all, low economic growth translates into low demand for borrowing.
So even with wider lending margins, the benefits could be limited if borrowing volumes are subdued. There is also still the fallout relating to the motor financing scandal.
While the Supreme Court’s ruling significantly reduced uncertainty, Lloyds isn’t out of the woods just yet, and the impact is already weighing on the all-important RoTE. When including the related costs for motor financing, the RoTE drops from 14.6% to 11.9%.
That’s certainly not terrible, but it’s behind management’s 12% target. And if economic conditions were to move in the wrong direction, a sudden increase in loan defaults and a decrease in credit quality could drag the bank’s performance even lower.
The bottom line
As bank stocks go, Lloyds seems to be in a relatively strong position, even with some regulatory uncertainty. However, with its fate ultimately tied to that of the British economy, and the latter achieves lacklustre growth, I think there are better opportunities to explore in this space rather than Lloyds.
