Is Lloyds Poised for More Gains After Digital Expansion and 90% Share Price Surge?

• Ever wondered if Lloyds Banking Group stock might be undervalued right now? You are not alone, as many investors are searching for clarity amid the excitement in the UK banking sector.
• Shares in Lloyds have posted impressive returns, surging 10.5% in the past week, almost 10% in the past month, and an incredible 90.5% over the last year.
• These moves have caught attention, especially after recent news featuring the bank’s commitment to expanding its digital services and strategic partnerships in the financial technology space. With markets responding to renewed confidence in UK banks, Lloyds’ momentum is hard to ignore.
• But what do the numbers say? Lloyds Banking Group scores a 2 out of 6 on our valuation checks. Let’s look deeper at how these valuations are calculated, and stay tuned for an even smarter approach to uncovering value before the end of this article.

Lloyds Banking Group scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Lloyds Banking Group Excess Returns Analysis

The Excess Returns valuation model takes a close look at how efficiently Lloyds Banking Group generates profits from its invested capital, after accounting for the cost of equity. This approach focuses not on cash flows or dividends, but on the ability to deliver returns that exceed what shareholders expect for the risks they take.

Using this model, Lloyds shows a Book Value of £0.77 per share and a Stable Earnings Per Share (EPS) estimate of £0.10, based on weighted future Return on Equity projections from 14 analysts. The model sets the Cost of Equity at £0.07 per share and arrives at an Excess Return of £0.04 per share. Over the long run, analysts expect Lloyds to achieve an average Return on Equity of 13.15%. The stable Book Value projection, sourced from nine analysts, remains steady at £0.77 per share.

Bringing these numbers together, the Excess Returns valuation implies an intrinsic value that is 32.7 percent above the current market price. In other words, Lloyds Banking Group stock appears to be significantly undervalued right now based on its ability to generate excess returns for its shareholders.

Result: UNDERVALUED

Our Excess Returns analysis suggests Lloyds Banking Group is undervalued by 32.7%. Track this in your watchlist or portfolio, or discover 928 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Lloyds Banking Group.

Approach 2: Lloyds Banking Group Price vs Earnings

The Price-to-Earnings (PE) ratio is widely used for valuing profitable companies because it offers a straightforward way to compare what investors are willing to pay today for one pound of current earnings. This metric works best for businesses that consistently generate profits, making it a reliable indicator of how the market values their earnings power.

While a "normal" or fair PE ratio can vary, the key factors are growth expectations and risk. Companies with higher expected earnings growth or lower risk typically trade at higher PE ratios. Conversely, if growth is expected to stall or market risks increase, the fair PE multiple tends to shrink.

Currently, Lloyds Banking Group's PE ratio sits at 16.4x, which is above both the banking industry average of 10.4x and the peer group average of 11.3x. At first glance, this might suggest that Lloyds is priced at a premium compared to its sector.

However, Simply Wall St's proprietary "Fair Ratio" provides a more tailored benchmark by calculating what Lloyds' PE should be based on its unique balance of earnings growth, risk, and competitive advantages. For Lloyds, the Fair Ratio is estimated at 9.7x. This method is more robust than simply comparing to peers or industry averages because it accounts for Lloyds’ specific fundamentals, rather than broad metrics that may not capture its strengths or challenges.

Comparing the Fair Ratio with Lloyds' actual PE reveals that the company is currently trading well above what would be deemed fair value for its earnings. Investors appear to be paying up for Lloyds, possibly due to optimism around growth and stability, but the stock looks overvalued by this measure.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1440 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Lloyds Banking Group Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives. A Narrative is your opportunity to combine the numbers with your perspective on a company, allowing you to outline the story you see behind Lloyds Banking Group’s prospects. This approach ties your forecast for future revenue, earnings, and margins directly to a fair value estimate.

Rather than solely relying on traditional metrics, Narratives let you document why you think Lloyds will succeed (or face headwinds) and watch how your views map to potential returns and a Fair Value, all in one place. This tool, available on Simply Wall St’s Community page and used by millions of investors, offers an accessible way to make smarter buy and sell decisions by continually comparing your Fair Value to the actual share price.

Narratives are dynamic. When new information, like quarterly earnings or industry developments, emerges your fair value updates automatically, keeping your investment decision anchored in the latest data.

For example, one investor might believe that Lloyds' focus on digital transformation and cost discipline will result in earnings at the top end of analyst forecasts and a price target near £1.03. Another may be more cautious, highlighting margin pressures and regulatory risks, arriving instead at a fair value closer to £0.53.

Do you think there's more to the story for Lloyds Banking Group? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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