Will Lloyds Shares Reach £1?

Lloyds (LLOY:LON) shares have performed well in 2024. After starting the year at a price of 48p, they’ve climbed to 57p – a gain of around 19%. Could the share price go on to hit £1 in the near future? Let’s take a look.

Are Lloyds shares undervalued?

At today’s share price of 57p, Lloyds sports a forward-looking price-to-earnings (P/E) ratio of about nine. That P/E ratio is well below the market average (the median P/E ratio across the FTSE 100 index is about 14).

However, this doesn’t necessarily mean that Lloyds shares are undervalued at present. Historically, banks like Lloyds have traded at low earnings multiples due to the fact that they are highly cyclical businesses.

Personally, I believe that a P/E ratio of nine for Lloyds is about right (i.e. the shares are fully valued) and that we’re unlikely to see much multiple expansion in the future. After all, JP Morgan – which is widely regarded as one of the best banks in the world and has an excellent track record when it comes to generating wealth for investors – only has a P/E ratio of about 12 currently.

Higher earnings could boost the share price

So, the way I see it, Lloyds’ earnings need to rise for the shares to continue climbing from here. For the shares to hit £1, we’d need to see substantial growth in earnings per share in the years ahead. This scenario probably isn’t realistic though. That’s because, right now, Lloyds is facing multiple challenges.

Multiple headwinds

First, interest rates are falling. Generally speaking, lower interest rates are bad for bank profitability as they reduce the spread between borrowing and lending rates (banks make money from this spread). Some economists believe that UK interest rates could hit 3.5% by the end of 2025 (versus 5% today). If rates were to decline to this level, Lloyds’ profit margins could be squeezed.

Second, the UK economy is relatively weak. This year, the UK economy is expected to grow by just 0.7% according to the International Monetary Fund (IMF). Next year, growth is expected to rise to 1.5%. But that’s still relatively low, and unlikely to put a rocket under Lloyds’ earnings.

Third, competition is increasing in the banking space. Currently, Lloyds is facing competition from a number of new digital banks – including the likes of Revolut, Monzo, and Chase – all of whom are aggressively trying to capture market share.

Another issue to consider is talk of changing the way the Bank of England (BoE) pays interest on bank reserves. Currently, UK taxpayers are paying banks like Lloyds almost £40 billion a year due to the fact that the BoE pays interest on reserve deposits that commercial banks are required to hold at the central bank for regulatory purposes. If this structure was changed, Lloyds’ profitability could be impacted negatively.

Lloyds share price forecasts

Given these factors, I think it’s unlikely that Lloyds’ earnings will rise enough to push the shares to £1 in the medium term. There could be some share price upside on the cards, but I’d be very surprised if the shares were to reach £1.

It seems City analysts agree with me. Currently, the average share price target for Lloyds is about 63p. So, analysts see a little bit of upside from current levels. But they’re not expecting the stock to hit £1 any time soon.