Lloyds Banking Group plc (LYG): what the price requires
At today's price, Lloyds Banking Group plc (LYG) is priced for 14.0% return on equity. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.
Generated: 2026-07-19 · Exported: 2026-07-20 · Source: https://boothcheck.com/report/LYG
Headline
| Field | Value |
|---|---|
| Ticker | LYG |
| Company | Lloyds Banking Group plc |
| Sector / Industry | Financial Services |
| Current price | $5.98/sh |
What The Price Requires (Inversion)
The assumption today's price embeds, recovered by inverting the valuation.
| Field | Value |
|---|---|
| Inversion basis | financials |
| Price-to-book | 1.62x |
| Return on equity now | 11.2% |
The implied return on book is non-physical at this price-to-book and is suppressed as misleading. The price sits beyond a 12.4% return on equity sustained for 40 years and is not resolvable as a sustainable-ROE point. The rarity read below is the honest signal.
Solve inputs: computed at a 10.2% cost of equity; ROE searched up to the 12.4% ROE ceiling.
How unusual the bet is: extreme
| Reference | Value |
|---|---|
| vs own history | +1.65σ |
| cohort percentile (of 120 peers) | 72 |
| sustained it ~10 years at this level | 63% |
| implied end-window share | 0% |
Valuation X-Ray
Every valuation family lands below the price. The price therefore requires assumptions beyond what those standard frames encode.
How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.
| Family | Median price/FV | Models | Reads |
|---|---|---|---|
| Asset | 1.32x | 3 | expensive |
| Earnings | 2.39x | 2 | expensive |
| Relative | 1.33x | 1 | expensive |
| Growth | 1.72x | 2 | expensive |
Families that call it expensive: Earnings, Growth
The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 3.1%); the inversion above states its own rate.
Per-Model Detail (n=8)
| Model | Family | FV | Price/FV | Applicable | Methodology |
|---|---|---|---|---|---|
| DCF Perpetual Growth | Growth | — | — | no | — |
| Bank Fair Value (P/TBV) | — | $4.71 | 1.27x | yes | TBVPS $4.05 × 1.16x (ROE (TTM) 9.9% / CoE 9.3%, g=5.0% (sustainable: 65% retention × ROE, 5% cap; not the terminal-growth assumption)) |
| Relative Valuation | Relative | $4.50 | 1.33x | yes | P/E 10x (static sector reference · 2026-04), scenarios: 8.2x / 10.0x / 11.8x (bear / base = reference held flat / bull), EV/EBITDA N/Ax |
| Simple DDM | Growth | — | — | no | — |
| Two-Stage DDM | Growth | $2.55 | 2.34x | yes | Stage 1: -1% for 5yr, Stage 2: 3.5% perpetual |
| Simple Excess Return | Asset | $4.36 | 1.37x | yes | BV/sh $4.05, ROE (TTM) 9.9%, ke 9.3% |
| Two-Stage Excess Return | Asset | $4.51 | 1.32x | yes | 5yr excess ROE then converge to ke=9.3% |
| Discounted Future Market Cap | Growth | $5.40 | 1.11x | yes | Rev $24.6B, growth 11% (input: historical growth; tapered), Terminal P/S: 3.0x / 3.6x / 4.3x (bear / base = today's held flat / bull, cap 12x) |
| Growth-Adjusted P/E | Relative | — | — | no | — |
| Margin Trajectory | Growth | — | — | no | — |
| Earnings Power Value | Earnings | — | — | no | — |
| Residual Income | Asset | — | — | no | — |
| Graham Number | Asset | $5.69 | 1.05x | yes | √(22.5 × EPS $0.35 × BVPS $4.05) — Graham's conservative floor |
| EV/EBITDA Relative | Relative | — | — | no | — |
| FCF Yield | Earnings | — | — | no | — |
| SBC-Adj FCF Yield | Earnings | — | — | no | — |
| Ben Graham Formula | Earnings | $1.85 | 3.23x | yes | EPS $0.35 × (8.5 + 2×-1.1%) × (4.4 / 5.3%) |
| ROIC-Justified P/B | Asset | — | — | no | — |
| P/Sales Sector | Relative | — | — | no | — |
| PEG Fair Value | Relative | — | — | no | — |
| Earnings Yield | Earnings | $3.83 | 1.56x | yes | EPS $0.35 / required return 9.3% (Rf 4.3% + ERP 5.0%) |
| Funds From Operations Multiple | Relative | — | — | no | — |
| Clinical Phase NPV | Growth | — | — | no | — |
| Merton | Asset | — | — | no | — |
| V5 Mechanical | — | — | — | no | — |
Solvency
| Field | Value |
|---|---|
| Share count CAGR (buyback) | -4.2% |
Deposit/float-funded balance sheet: debt is funding, not corporate leverage, and GAAP operating cash flow follows loan flows. Net-debt, interest-coverage, and cash-burn lenses do not apply. The solvency frame for a financial is regulatory capital and payout capacity (CET1, stress buffer, dividends plus buybacks against earnings).
Bullet Takeaways
- Lloyds is the UK's biggest retail bank and its largest mortgage lender, funded by a vast, cheap deposit base that lets it earn a wide margin on a low-risk loan book.
- The catch is the price: at about 1.6x book, every standard valuation method lands below where the shares trade, so the market is paying for an elite return the bank does not currently earn on its equity.
- Two things to watch are the next half-year results and the rollout of the FCA motor-finance redress scheme, against which Lloyds has set aside 1.95 billion pounds, the largest provision of any UK lender.
Bull Case
The moat is funding, and it shows up in the margin. Lloyds sits on about 496 billion pounds of customer deposits and the country's largest mortgage book at roughly 325 billion pounds, run under the Lloyds, Halifax and Bank of Scotland brands. A deposit base that size, much of it held in low-rate current accounts, is a cheap and sticky source of funding that smaller lenders cannot replicate. That funding edge is why the bank can lend against low-risk UK mortgages and still earn a healthy spread: the banking net interest margin reached 3.17% in the first quarter of 2026, up 14 basis points on the year. The moat is not a brand story. It is the cost of the money.
The returns follow the funding. On a tangible-equity basis the bank posted a return of 17.0% in the first quarter of 2026 and guides to above 16% for the year. Part of that is the structural hedge, a maturing bond portfolio that keeps rolling onto higher fixed rates and lifts income even as the Bank of England cuts. The bull view is that a low-cost deposit franchise plus that hedge makes a mid-teens tangible return durable rather than a rate-cycle peak, and that the sheer scale of the deposit base gives Lloyds a structural cost advantage no challenger can match on price.
The capital comes back steadily. The share count has fallen about 4% a year, the 2025 dividend was raised 15%, and the group announced a buyback of up to 1.75 billion pounds, with total distributions of 3.9 billion pounds for the year. At roughly $5.98 as of July 19, 2026, about 1.6x book, the bull is betting the franchise keeps earning that elite return long enough to warrant paying above what the standard methods see, and that with motor finance already provided for, the conduct overhang clears rather than deepens. A bank earning a mid-teens tangible return while shrinking its share count does not need the multiple to expand; it needs the return to hold through the cut cycle.
Bear Case
Look at the asset side and the risk turns structural. Lloyds is, more than any UK peer, a bet on the British mortgage. Its loan book is dominated by roughly 325 billion pounds of UK home loans, a low-default but low-spread asset whose profitability leans on cheap deposits and the structural hedge rather than on credit pricing. That concentration cuts both ways. It is safe in a stable economy and heavily exposed to one thing, the UK housing and rate cycle. When the Bank of England cuts and deposit competition returns, the very margin that makes the mortgage book pay is what compresses first.
That matters because the price already assumes the good years continue. Every standard valuation method lands below the current price, and the price embeds a return on equity in the sector's elite tier, sustained for an extraordinarily long stretch. That is well above what the bank actually earns on its equity today. The engine rates the assumption behind the price at the most demanding end of its scale. If the tangible return mean-reverts from its current mid-teens level toward the cost of capital as rates fall, the price-to-book the market supports compresses, and at about 1.6x book today there is more room to fall than for a bank priced near book.
Then there is the bill the bank is still paying. Lloyds, through Black Horse, was the UK's largest motor finance lender, and it sits at the center of the car-finance mis-selling redress. It has set aside 1.95 billion pounds for the FCA's industry-wide scheme, the largest provision of any UK lender, held unchanged after it reviewed the regulator's final rules. The scheme covers agreements written between 2007 and 2024, with payouts now beginning to flow. Provisions can move, and a conduct liability this size is capital that funds redress rather than buybacks. None of it threatens solvency, but it is a direct claim on the capital return the bull case leans on, and it lands just as the rate cycle turns against the margin.
Valuation
A bank is valued off the return it earns on its capital, so the price reads against book, not an earnings multiple. At $5.98 as of July 19, 2026, Lloyds trades at about 1.6x book, and that is the whole tension: every standard method lands below the current price. Book value plus profitability sits modestly below; the earnings-power methods well below; even the growth-adjusted methods do not reach it. The price is a bet beyond what any of the standard frames encode, and the engine rates the assumption behind it at the most demanding end of its scale.
Put plainly, the price requires the bank to keep earning an elite return on its capital, near the top of what the sector sustains, for a very long time. It earns about 11.2% on its equity now. On a tangible-equity basis the current return is higher, in the mid-teens, and management guides above 16% for 2026; the debate the price is really having is whether that tangible return is the normal level or a rate-cycle high. The standard methods assume it normalizes lower, which is why they land under the price, while the bull assumes it holds. That gap between a mid-teens tangible return today and a lower through-cycle return is the entire argument.
For a bank the downside frame is capital and payout, not net debt, and deposits fund the book, so coverage and cash-burn lenses do not apply. Lloyds generates capital strongly and runs a CET1 ratio around 13%, comfortably above requirement, and returns it through a rising dividend, a buyback, and a share count that keeps falling. Set against that is the motor-finance provision, 1.95 billion pounds of capital already earmarked for redress rather than shareholders. The balance sheet is not the risk here. The risk is that an elite return and a full 1.6x book multiple both have to hold through a rate-cut cycle while the conduct bill is still being paid.
Catalysts
The recent prints show a bank firing on operations while carrying a conduct charge. Full-year 2025, reported 29 January 2026, delivered statutory pre-tax profit of about 6.7 billion pounds, up 12%, with a tangible-equity return of 12.9%, held down by the motor-finance charge and 14.8% without it. The group lifted the dividend 15% to 3.65 pence and announced a buyback of up to 1.75 billion pounds. First-quarter 2026, reported 29 April 2026, was stronger still: profit up sharply, a tangible-equity return of 17.0%, and a net interest margin of 3.17% as full-year guidance was raised.
The motor-finance redress scheme is the defining external event. The FCA confirmed its industry-wide scheme on 30 March 2026, covering car-finance agreements written between April 2007 and November 2024, with average payouts estimated near 829 pounds per agreement and an industry-wide cost the regulator put around 7.5 billion pounds. Lloyds has held its provision at 1.95 billion pounds after reviewing the final rules, the largest set-aside of any UK lender. Whether that number holds as claims are processed is the swing factor for capital return over the next year.
The next checkpoint is the half-year results, where the market will read the tangible-equity return against the above-16% full-year guide and look for any change to the redress provision. With underlying net interest income guided to about 14.9 billion pounds for 2026, the income line is largely set; the open questions are how far the margin holds as rates fall and how cleanly the motor-finance scheme runs off.
Methodology Note
- Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
- Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
- Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
- Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.
Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.
Sources
Lloyds Q1 2026 results · FCA PS26/3, 30 March 2026; Lloyds motor finance provision · Lloyds FY2025 results · Lloyds motor finance provision; FCA PS26/3, 30 March 2026 · FCA PS26/3 · Lloyds motor finance provision · FCA PS26/3, 30 March 2026