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Lloyds (LSE:LLOY) was one of the FTSE 100‘s best performers in 2025, its shares rising almost 80% in value.
Retail banks were under pressure as the UK economy struggled and interest rates dropped. But a strong operating performance reassured investors and helped Lloyds’ share price spring to just below £1.
Is the Black Horse bank a top stock to consider in 2026? Let’s consider some of the key elements of its investment case.
1. Still motoring
Tough economic conditions can play havoc with banks’ profits, hammering loan growth and driving up impairments.
Lloyds’ excellent loan quality has helped it negotiate these pressures, resulting in the enormous share price gains of last year. For 2025, it targeted a rock-bottom asset quality ratio (which measures bad loans against total loans) of 0.2. It was 0.18 in the first nine months of the year.
Supreme brand power has also helped the company grow loans despite tough economic conditions. Net income rose 6% in the nine months to September. Strong brand recognition could help Lloyds to thrive again next year.
Or could it? While Lloyds’ performance has been impressive of late, it may run out of steam as the economic landscape worsens.
The Office for Budget Responsibility (OBR) recently slashed its UK growth forecasts to 1.4% for 2026. This was down half a percentage point from previous estimates.
It’s not just a weak economic conditions that could to trouble Lloyds. The threat from digital-led banks, which offer excellent customer service and ultra-competitive products, is steadily increasing. And it could get much worse from next year, if looser regulatory rules encourage mergers and acquisitions among the challenger banks.
3. Home comforts
One major weapon Lloyds has in its arsenal, though, is its leading position in mortgages. Holding a fifth of the home loans market, the bank enjoys a major earnings driver.
Encouragingly, the outlook here is improving as the Bank of England trims interest rates. Building society Nationwide expects average house values in the UK to increase up to 4% in 2026 as homebuyer affordability steadily improves.
I’m expecting Lloyds to enjoy strong and sustained mortgage growth as Britain’s population steadily improves. Government plans to build 300,000 new homes a year to 2029 by reducing planning red tape could give it an extra boost.
4. Looking pricey
While Lloyds has proved pretty resilient, its subsequent share price surge now leaves it looking hugely expensive.
At 12.8 times, the bank’s trailing 12-month price-to-earnings (P/E) ratio is miles above the 10-year average of 9.7. Furthermore, its price-to-book (P/B) multiple of 1.5 sails above the average of 0.9 seen over the last decade.
It also indicates Lloyds trades at a meaty premium to the value of its assets. This could substantially reduce the bank’s chances of enjoying more juicy share price gains.
The verdict on Lloyds
So on balance, are Lloyds shares a top Buy for 2026? I’m not so sure.
To my mind, the good news surrounding the bank is more than baked into its current share price. And it faces significant challenges that could pull it sharply lower in the New Year. I’d personally rather find other FTSE 100 shares to invest in.
This story originally appeared on Motley Fool
