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Lloyds‘ (LSE:LLOY) shares have more than doubled in value over the past two years. That makes it one of the strongest players in the FTSE 100 and there is momentum that many investors will find hard to ignore.
However, the important question is whether the stock still represents good value? The short answer is: it’s not profitable anymore.
Cyclicality and the margin of safety
Today, Lloyds trades at around 13.3 times forward earnings (FY2025), but that falls to 10.3 times in FY2026.
The first thing that stands out is the difference between that figure for 2025 and 2026. This tells us that income is increasing. In fact, analysts are predicting earnings growth of 29.9% in 2026.
Although this income growth figure is indeed strong, it is important to note that this is not a long-term sustainability. Banks are notoriously cyclical and reflect the health of the economy.
That raises the risk that today’s ratings may reflect something closer to earnings (this cycle), driven by high interest margins and unusually poor credit conditions. If the economy weakens or prices fall, profits can quickly deteriorate, making current valuations look more compelling than they first appear.
This is where margin of safety becomes a problem.
It’s not that cheap
Of course, 10.3 times forward earnings isn’t cheap compared to the rest of the index or especially tech stocks. This is why measurement is always contextual. I would suggest that it trades in line with its peers.
One useful piece of content is historical measurement. Three years ago, the bank was trading at 6.7 times forward earnings but forecasts (unreasonably) didn’t grow – due to concerns about the cost of bankruptcy during the cost of living crisis.
it paid dividends of 4.9% compared to 3.3%. The price-to-book ratio was 0.67 compared to 1.29 currently.
The obvious point here is that, at face value, it’s not as cheap as it used to be. But it may be cheaper today on a growth-adjusted view. It all depends on how Lloyds can continue to grow revenue this cycle.
Missing the ‘mega-IPO’ wave
Lloyds derives a large proportion of its profits from lending. The company famously lacked an investment banking arm, having scaled back its UK sales after the financial crisis. That means it might miss a potential “super-cycle” to book runners.
Lowering interest rates and private equity backlogs ultimately resulted in “mega-IPOGlobal giants are racing to list with SpaceX targeting a $1.5trn valuation, OpenAI eyeing $1trn to fund its massive computing needs, and Revolut pursuing the first $75bn fintech blockbuster.
For investment banks like Goldman Sachs or Barclays2026 is a money printing bonanza.
An important point
It may sound like I’m putting Lloyds down a bit, but I’m not. I still believe it is worth considering as a long-term investment. However, given the nature of banking, some caveats are in order.
