As we stride purposefully into 2025, my mind’s on the Lloyds (LSE: LLOY) share price. After starting 2024 at a gallop, it stumbled badly.

That allowed it to be overtaken by FTSE 100 rivals Barclays and NatWest. They raced ahead in the final furlongs of 2024.

Lloyds shares are up 15% over the last year, which is more than respectable. Except that Barclays and NatWest rocketed 72% and 82% respectively. So what went wrong?

Lloyds was unseated by its Black Horse division, which got swept up in the motor finance mis-selling scandal.

This FTSE 100 bank could play catch up

The board originally set aside £450m for potential fines and customer compensation, but RBC Capital Markets has since warned it could take a £3.2bn hit. It put Barclays down for a mere £400m.

I’ve backed the wrong horse. However, once the trailing 5% yield’s included, I still made a total return of around 20% last year. Better still, while Barclays and NatWest may have run their race, Lloyds has some catching up to do. 

I can see real potential for a strong 2025, but much depends on how the motor finance misery plays out. Personally, I’ve got no idea. Neither has Lloyds. Nor does RBC Capital (hopefully, given its gloomy prognosis). So the shares are a bit of a punt.

Banking stocks flew last year as profits increased and interest rates stayed relatively high, allowing them to maintain net interest margins. That’s the difference between what they pay savers and charge borrowers.

The UK economy slowed in the second half of the year, as the new government had a troubled start and inflation proved sticky.

Happily, the housing market stood firm, despite relatively high mortgage rates. That’s good news for Lloyds, which via subsidiary Halifax is the UK’s biggest mortgage lender. While Q3 statutory profits declined 2% on last year, they still totalled £1.82bn.

Still a brilliant dividend income stock

Everyone seems gloomy right now, with inflation forecast to top 3%, consumers anxious, tax hikes landing in April and talk of a recession. The downbeat mood may have been overdone. We’ll see.

Lloyds has worked hard to streamline its operations, closing costly branches as it pivots towards higher margin areas like digital banking and wealth management. Its partnerships with fintech players could pay dividends in the long run.

Talking of dividends, I’m optimistic on that front. Analysts reckon the shares will yield a bumper 5.58% this year. By 2026, that’s expected to hit 5.95%.

That looks good today. It will look even better when interest rates finally fall, dragging down the yields on cash and bonds. With luck, that will lure in more income seekers.

I don’t expect the shares to take off until the motor finance issue’s parked. And maybe not even then if the compensation bill’s massive.

To answer my own question, yes, Lloyds shares could mount a magnificent comeback but we may have to be patient. My strategy’s simple. I’m holding on to the shares throughout the market cycle, and reinvesting every dividend I get.

Over the longer run, I hope to reap a magnificent total return.