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The Lloyds (LSE:LLOY) share price has endured a volatile start to 2025. It’s been weighed down by the motor finance mis-selling scandal and renewed tariff threats from Donald Trump. These twin pressures have cast a shadow over the bank’s outlook, with regulatory uncertainty and geopolitical risk shaking investor confidence.
Despite a relatively stable macro backdrop in the UK, Lloyds now finds itself navigating a more complex environment. It’s an environment where litigation risk and international trade tensions threaten to eclipse the steady progress seen in its core retail and commercial banking operations.
Looking beyond the noise
Despite recent volatility, Lloyds shares may be poised for a re-rating over the next 24 months. Remember, the stock is up from where it was a couple of years ago, but it’s down over 10 years. The stock just hasn’t had the right conditions to grow.
The current forward price-to-earnings (P/E) ratio of 10.2 times appears elevated due to analysts factoring in provisions for a potential fine (£1.2bn has been set aside) related to the motor finance investigation. However, looking ahead, the forward P/E should decrease to 7.5 times in 2026 and further to 6.2 times in 2027, based on projections, indicating potential undervaluation as earnings normalise.
UK GDP growth forecasts support this optimistic outlook. The Office for Budget Responsibility projects real GDP growth of 1% in 2025, 1.9% in 2026, and 1.8% in 2027. Similarly, S&P Global anticipates GDP growth of 1.5% in 2025, 1.6% in 2026, and 1.5% in 2027. This steady economic expansion could bolster Lloyds’ core retail and commercial banking operations.
With a price-to-book ratio of 0.94 times and an enterprise value to EBIT (earnings before interest and taxation) multiple of 5.04 times, Lloyds shares appear cheap compared to their counterparts. As regulatory pressures subside and the UK economy returns to a more normalised growth trajectory, the stock may experience significant gains.
The interest rate conundrum
Lloyds faces a mixed picture in regards to the interest rate environment through 2027. The bank must balance potential challenges from declining rates while taking opportunities arising from its strategic hedging practices.
The Bank of England’s base rate, currently at 4.5%. This is projected to decrease over the coming years. Currently, most forecasts suggest a move to 3.5% by the end of the year, but there’s a lot of economic data that could influence that.
Oxford Economics anticipates a further decline to 2.5% by 2027. The group note structural factors like demographic shifts and subdued productivity growth. These projections suggest a prolonged period of lower interest rates, which could compress net interest margins for banks reliant on traditional lending.
However, Lloyds and its UK peers have proactively managed this risk through structural hedging strategies. By employing interest rate swaps to balance liabilities such as customer deposits and shareholder equity, Lloyds aims to stabilise revenues amid rate fluctuations. This approach, often referred to as ‘the caterpillar’, allows for consistent replacement of swaps, making interest income more predictable.
Personally, I’m being quite cautious during this period of volatility. However, I still believe Lloyds shares aren’t overpriced. Assuming no major hiccups, I’d expect to see the stock trading around 80p-85p. That’s based on a forward P/E of 7.5-8 times for 2027 — using the current forecast.
