Lloyds Banking Group (LSE:LLOY) is currently experiencing fluctuating share prices, sitting around 95p. This positions the shares only 5.3% below the significant £1 mark. Investors are left wondering whether the shares will reach this threshold or drop further.
Lloyds Shares: A Closer Look at Valuation
The Bearish Perspective
The company’s shares are considered the most expensive among the FTSE 100’s five major banks, based on forward price-to-earnings (P/E) ratios for 2025. Analysts suggest that if Lloyds were valued similarly to its competitors, its stock would be around 76p—approximately 25% lower than current levels.
Lloyds holds a price-to-book (PTB) ratio of 1.17, making it the second most expensive among peer institutions. Research from McKinsey & Company highlights that banks should generally be valued at or near their net asset values, which casts doubt on Lloyds’ high valuation. The report indicates that several factors, including declining interest rates and evolving consumer behavior, are leading investors to question the sustainability of banks’ recent performance.
The rise of fintech companies and alternative credit firms is also intensifying competition, potentially limiting traditional banks like Lloyds from commanding higher market valuations. Additionally, the bank’s reliance on the UK economy could be risky, especially as recent budget forecasts for economic growth in 2026 and beyond have been downgraded.
The Bullish Outlook
Conversely, many analysts project a positive future for Lloyds shares. They anticipate a 12-month average target of 99.5p, inching close to the crucial £1 mark. The most optimistic predictions suggest the shares could reach 110p, supported by an expected 79% increase in earnings per share by 2027.
The bank also offers a competitive dividend, currently yielding 3.8% over the past year. Expectations indicate a potential 51% increase in dividends over the next three years, resulting in a forward yield of around 5.1%.
Conclusion
After analyzing both perspectives, my inclination leans towards the bearish view. Lloyds shares appear overvalued, with limited potential for significant growth. I wouldn’t be shocked to see the shares hit 100p by the end of 2025, but any further increase will likely require substantial positive shifts. Conversely, challenges related to the UK economy could impact the stock price, although I believe it’s unlikely to fall as low as 76p.
Lloyds remains popular among smaller investors, possessing more shareholders than any other company in the UK. Its earnings trajectory provides some support for its share price, and despite my concerns regarding its valuation, I recognize Lloyds as a well-managed institution. However, the other banks within the FTSE 100 currently appear more attractively priced.
