Lloyds‘ (LSE: LLOY) shares are down 10% from their recent (4 February) one-year-traded high. I think this largely reflects profit taking after the run-up in the shares prior to the bank’s strong 2025 results.

However, regardless of the current price, there may still be much more value left in the stock. This is because value reflects business fundamentals, whereas price is just whatever the market will pay at any given time.

In this context, Lloyds is delivering robust profits, tight cost control, and strong credit performance. And its dominant position in retail banking gives it enormous leverage to any improvement in consumer confidence.

So how high could the shares go?

How’s earnings growth look?

Ultimately, any firm’s share price is driven by growth in earnings (profits). A risk to these for Lloyds remains the intense competition in the UK banking sector that could squeeze its margins. However, analysts’ consensus forecasts are that its earnings will grow by 12% a year to end-2028.

This looks well supported by the bank’s 2025 results, released on 29 January. Profit before tax jumped 12% year on year to £6.7bn, outstripping analysts’ forecasts of £6.4bn. This partly reflected a 7% rise in net income to £18.3bn. This followed strong customer‑led lending across mortgages, cards and unsecured borrowing.

As a result, Lloyds lifted its key profitability target — return on tangible equity — to 16%+ in 2026, against just 12% for 2025. It also announced a £1.75bn share buyback, which is generally supportive of share price gains. 

What are the shares really worth?

In my experience as a former senior investment bank trader, the best valuation is discounted cash flow (DCF) analysis. This identifies where any company’s share price should be priced, based on forecast cash flows for the underlying business. These also reflect the consensus long-term earnings growth forecasts of analysts for the firm.

In doing so, it produces a clean, standalone valuation that is unaffected by over- or undervaluations across a business sector.

Some analysts’ DCF modelling for Lloyds is more conservative than mine, and others are more bullish. However, my modelling — including an 8.4% discount rate — shows the shares are 42% undervalued at their current £1.03 price. Therefore, their ‘fair value’ is £1.78.

This gap between the stock’s price and value is crucial for long-term investor profits. This is because a share’s price tends to converge to its fair value over time. So for Lloyds, this big gap suggests a potentially terrific buying opportunity to consider if those DCF assumptions hold.

My investment view

I already have two stocks in the banking sector — HSBC and NatWest, so buying another would unsettle the risk/reward balance of my portfolio.

However, I think Lloyds’ strong earnings growth prospects will power its share price toward its fair value over time. I — and other analysts — also believe it will lift its dividend yield too. Over the medium term, the forecasts are for this to rise from the present 3.5% to 5.1% by the end of 2028.

Overall then, I think the stock is well worth the attention of other investors. In the meantime, I have my eye on other higher-yield stocks that are also deeply underpriced to their fair value.