Is the Lloyds share price set to experience a magnificent recovery in 2025?

As we move purposefully towards 2025, my mind is on Lloyd’s (LSE: LLOY) share price. After starting 2024 at a gallop, he stumbled badly.

This allowed him to be surpassed by FTSE 100 rivals Barclays and NatWest. They moved forward in the final stages of 2024.

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

Lloyds was ousted by its Black Horse division, which became embroiled in the car finance mis-selling scandal.

This FTSE 100 bank could catch up

The board originally set aside £450m for potential fines and compensation to clients, but RBC Capital Markets has since warned it could take a hit of £3.2bn. He put up Barclays for just £400m.

I’ve bet on the wrong horse. However, once the final 5% return was included, last year I had a total return of around 20%. 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 a lot depends on how the auto financial misery plays out. Personally I have no idea. Neither did Lloyds. Neither will RBC Capital (hopefully, given its gloomy outlook). So the stock is a bit risky.

Bank stocks soared last year as profits rose and interest rates remained relatively high, allowing them to maintain net interest margins. That’s the difference between what they pay savers and what they charge borrowers.

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

Fortunately, the housing market remained strong, despite relatively high mortgage rates. This is good news for Lloyds, which through its subsidiary Halifax is the largest mortgage lender in the United Kingdom. While third quarter statutory profits were down 2% on last year, they still amounted to £1.82bn.

Still a brilliant dividend income stock

Everyone seems pessimistic right now, with inflation expected to exceed 3%, anxious consumers, tax hikes coming in April, and rumors of recession. The pessimistic mood may have been exaggerated. We’ll see.

Lloyds has worked hard to streamline its operations, closing costly branches as it pivots into higher-margin areas such as digital banking and wealth management. Its partnerships with fintech players could pay long-term dividends.

talking about dividendsI’m optimistic on that front. Analysts estimate the stock will return a bumper 5.58% this year. By 2026, it is expected to reach 5.95%.

That looks good today. It will look even better when interest rates finally fall, dragging down cash and bond yields. Hopefully, that will attract more income seekers.

I don’t expect the stock to take off until the engine financing issue is put to rest. And maybe not even then if the compensation bill is huge.

To answer my own question, yes, Lloyds shares could recover magnificently, but we may have to be patient. My strategy is simple. I hold the stock throughout the market cycle and reinvest every dividend I earn.

Long termI hope to get a magnificent total return.