Lloyds (LSE:LLOY) shares are up 35% over six months. The stock has massively outperformed the index reflecting a positive macroeconomic picture for banks. So, £10,000 invested six months ago would now be worth £13,500. That’s a great return over such a short period of time.

What’s been going on?

Firstly, it’s worth noting that the bank’s results have remained strong even as interest rates have moderated. Net income rose 4% in Q1 2025, and net interest income increased 3%. This was supported by a stable interest rate environment and resilient UK economic conditions. 

Despite some challenges, such as higher operating costs and increased provisions for motor finance mis-selling, Lloyds has maintained profitability, reporting £1.1bn profit after tax in Q1 2025.

Shareholder rewards have been a key driver. Lloyds has aggressively increased its dividend (up nearly 15% in 2024) and launched substantial share buybacks, with £2bn repurchased last year and a further £1.7bn buyback underway. 

These capital returns have made the stock more attractive to investors, especially as analyst upgrades and bullish price targets from major banks have reinforced confidence in future performance.

The rally has also been supported by technical breakouts above long-term resistance levels and a broader recovery in the UK banking sector, with Lloyds now outperforming many of its FTSE 100 peers in 2025. 

The valuation picture

Lloyds’s forward valuation metrics reflect moderate expectations for earnings growth and continued capital returns. The forward price-to-earnings (P/E) ratio is projected at 11.7 times for 2025, dropping to 8.38 times in 2026 and 6.99 times in 2027, indicating anticipated earnings expansion.

Meanwhile, the price-to-book (P/B) ratio rises from 1.08 times in 2025 to 0.99 times in 2026 and 0.9 times in 2027, suggesting the stock remains valued below its book value despite recent gains. 

What’s more, the dividend yield remains attractive, forecasted at 4.53% in 2025, increasing to 5.4% in 2026 and 6.12% in 2027.

I’d suggest these metrics are broadly in line with its peers. The 2025 valuation looks more expensive than its peers and probably reflects the impact of impairment charges. However, growth in earnings and dividends is expected to be stronger than the peer group from there on.

The bottom line

There’s an element of risk in the valuation, however. Firstly, Lloyds remains more exposed to the Competition and Markets Authority (CMA) review into motor finance commission mis-selling. The outcome of which could still be financially challenging.

What’s more, it’s always inherently more risky to buy a stock based on growth expectations further into the future. The growth catalysts may be less tangible in the near term and less easy to predict.

Personally, I’m continuing to hold my Lloyds shares. They’ve doubled in value since I added them to my portfolio and my yield — based on my purchase price — is very strong. However, owing to concentration risk, it may not be right to buy more.

Despite this, I’d suggest Lloyds is still worth considering even though it’s probably trading closer to fair value than it did a year ago.