How do Lloyds shares measure up as a GARP investment?

Lloyds Banking Group (LSE:LLOY) shares have risen a whopping 25% so far in 2025, taking total gains over the last 12 months to a shade below 50%.

By comparison, the broader FTSE 100 has risen a more modest 5% and 12.8% over the same timeframe.

Following its astronomical rise, I’m curious to see how Lloyds’ share price looks from a GARP — or ‘Growth at a Reasonable Price’ — perspective. As the name suggests, this strategy aims to find shares that look cheap based on predicted profits, as measured by the price-to-earnings growth (PEG) ratio.

Here’s what I’ve found.

Test #1

To calculate the PEG multiple, I need to divide the price-to-earnings (P/E) ratio by expected earnings growth. Here’s what my calculations have thrown out:

As a GARP investor, I’ll be looking for a PEG reading of 1 or below. You’ll see that the bank misses this target for 2025, but also that next year’s ripping growth forecast drives its shares well inside this threshold.

Test #2

So Lloyds’ shares look relatively attractive as a GARP investment. But how does the Black Horse Bank score compared to the FTSE 100’s other banks?

Here you’ll see their earnings multiples based on predicted earnings for the next two years:

2025:

2026:

You can see that Lloyds’ PEG ratios are less impressive compared to sector peers Barclays and Standard Chartered. Both carry multiples below 1 for both 2025 and 2026).

In better news though, they’re roughly in line with NatWest’s over the period, while they also beat HSBC’s by a strong margin.

The verdict

Retail banks aren’t renowned for being high growth shares. But supported by a housing market recovery — and from 2026, a predicted bounce for the UK economy — City analysts think Lloyds’ will enjoy robust earnings over the near term. They also think the bank should benefit from further cost cutting (it booked £1.2bn worth of savings in 2024).

On paper then, it can be argued that Lloyds looks attractive from a GARP perspective. But I have my reservations. In my opinion, the risks to Lloyds’ current earnings forecasts are considerable. I feel the bank could struggle to grow revenues given the multiple threats to Britain’s economic recovery, with mounting competition adding to the strain.

Its net interest margin (NIM) — which slumped 16 basis points in 2024, to 2.95% — are also in danger of sliding further, as the Bank of England gears up for more interest rate cuts and competitive pressures increase.

Finally, Lloyds’ earnings could take a battering if the Financial Conduct Authority (FCA) finds the bank guilty of mis-selling car insurance. The costs of the ongoing case to Lloyds have been put as high as £4.2bn by investment firm KBW, far above the £1.2bn the bank has set aside.

On balance, I think GARP investors should consider buying other growth stocks instead.

This post was originally published on Motley Fool