Five ways Lloyds Bank could ‘wow’ investors in 2026
With a target price way above its current level, one City analyst claims the ‘magic may soon unfold’ at the high street lender. City writer Graeme Evans has the details.
15th October 2025 13:36
by Graeme Evans from interactive investor
Photo: Nathan Stirk/Getty Images.
A path to 100p for Lloyds Banking Group (LSE:LLOY) shares has been set out by a City bank after it highlighted five potential “reveals” that could “wow” investors in 2026.
They include an acceleration in dividend growth, which Jefferies believes could lead to a 2027 total distribution of 6p a share compared with the 3.17p declared for 2024.
- Invest with ii: Top UK Shares | Share Tips & Ideas | Cashback Offers
Today’s note backs a 25% upside for Lloyds shares to 105p, which if achieved would be the highest level since the financial crisis and double where they started this year.
Jefferies said: “All great magic tricks have three parts. The Pledge, The Turn, and The Prestige.”
For Lloyds, it said the Pledge came in early 2023 with a promised level of 15% or more in the key industry profitability measure of ROTE (Return on Tangible Equity) in 2026.
It added: “The Turn was this year as its shares started to outperform. The Prestige is still to come. But it could involve a move in ‘cash’ ROTE to 18-20% in 2027-28, on our estimates.
“Sit tight. The magic may soon unfold.”
- UK bank sector results preview: Q3 2025
- Could this risky approach solve the UK’s productivity puzzle?
- Analyst outlook for FTSE 100 mining stocks, small-caps and lithium
The upgrade from a previous target price of 103p came in the week that Lloyds increased its provision for motor finance redress by £800 million to £1.95 billion.
It is due to report third-quarter results on 23 October, with underlying profits before remediation costs set to show a 1% rise to about £1.9 billion.
Jefferies said today: “Lloyds has been building to this moment for three years. There is a question of timing given the Autumn Budget and Q3 earnings that may be lacklustre.
“But as the fog lifts post-motor (finance), we see five potential reveals that could wow investors in 2026.”
They include a potential further £2 billion tailwind from the structural hedges put in place to protect against interest rate volatility.
Jefferies’ analysis suggests that when swap rates were about 0.5% in the first half of 2021, the bank wrote about £60 billion of hedges with an average duration of six years.
It added another £80 billion in the second half of 2021 and first half of 2022. Jefferies said: “From this, we estimate Lloyds will experience a hedge tailwind of up to £1 billion year-on-year in both 2027 and 2028, adding about four percentage points to ROTE, all else equal.”
The bank also thinks that £4 billion in deferred tax assets will “awaken from its slumber” in 2026.
It said Lloyds has crystallised just £300 million of this in the last five years, thanks to huge taxable profit adjustments for capital allowances, pension contributions and surrendering of motor provisions to Bank of Scotland.
“We now expect the unwind to surge, adding £300-450 million per annum to free cash flow from 2026.”
A significant uplift in capital generation means Jefferies is backing the dividend to grow by an average 25% a year in 2025-27.
It said: “Management is wedded to a progressive policy so might not effect a one-off reset. But we forecast a 6p dividend by 2027.” This compares with the City consensus of 4.7p.
- FTSE 100 dividend stars: City view on M&G, Phoenix and L&G
- Bond Boss: where next after 30-year gilt yields hit headlines?
- Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
Assuming no M&A requirements, Jefferies believes the bank could execute more than £3 billion of buybacks in 2026 and switch to announcing its plans on a half-year basis.
The fifth “reveal” concerns the potential for a 10-basis point increase in net interest margin for the fourth quarter of this year, should the Bank of England leave rates unchanged this year.
Since the Bank started cutting rates, Lloyds’ personal savings accounts have spent an average 75 days of each quarter paying annual equivalent rates consistent with the prior policy rate.
Deposits will have reset post the August cut by 21 October, meaning this “gapping negative” could reverse in the fourth quarter. “We still assume a November rate cut, but the cash market does not. And reporting a fourth quarter margin beat would be a good way to start 2026.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.