Bank Watch Why BoE hike warning has not lifted bank shares

The Bank of England wants us to believe that it could raise interest rates as soon as November. In theory, that ought to have aided shares in Britain’s banks, not least the largest retail lender, Lloyds Banking Group. Higher rates are the most important ingredient banks need to make more money from lending: net interest income. If borrowing costs are or perceived to be on the brink of turning a corner, a potential rise in bank profits ought to be reflected in their shares.

But FTSE 100 bank shares fell immediately after The Bank’s statement last Thursday and stayed down after its Governor, Mark Carney, reiterated in a television interview that the possibility of the BoE’s first rate rise in a decade had “definitely increased”. On Monday, Lloyds shares remain most marked, trading down about 2% since Wednesday’s close. The path to any change in policy is unlikely to be easy to predict, even for the BoE, after all. And for banks, the link between share price performance and rates is no longer clear cut.

For one thing, potentially steepening inflation—primarily transmitted by sterling’s 4.8% trade-weighted jump since late August— is not an immediate benefit for domestic-focused banks like Lloyds. And even a single symbolic 25 basis point rise could hasten inflation in the medium term. Lloyds is also Britain’s biggest mortgage lender, so higher rates would have to be passed on to more of its borrowers than at its rivals. More widely, if rates rise and have to be ratcheted higher in a hurry, the risk of defaults rises too. That would be occurring at one the least opportune times economically, with a looming Brexit playing havoc with growth. Shares of FTSE banks with little UK exposure or buttressed by wider geographical diversification, chiefly Standard Chartered and HSBC, have outperformed Lloyds, RBS and Barclays this year for that reason.

The broader picture is that ten years on from the beginnings of the financial crisis in Britain, whilst banks have gone a long way to restoring their financial health and redeeming past misconduct, there’s still a long way to go, and it shows. That’s why, even if the end of the low rate era could be predicted, if when or when it comes, investors are signalling they don’t expect all boats to be lifted immediately.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.