Why Mark Carney Has Done The Banks A Big Favour

Piggy bankThere was a mixed message coming from the Bank of England this week, with the Monetary Policy Committee voting unanimously to hold rates at 0.5% but stating that interest rates could move upwards sooner than the market expects.

However, with inflation falling yet again to 1.5%, the chances of a 2014 interest rate rise seem distant at best because the Bank of England fears deflation more than it fears just about anything — including an overheating UK housing market.

A Boost For The Banks

Mark Carney’s comments surrounding an interest rate rise coming sooner than many market participants currently envisage could have a positive impact on banks such as Lloyds (LSE: LLOY) (NYSE: LYG.US), Barclays (LSE: BARC) (NYSE: BCS.US) and RBS (LSE: RBS). That’s because, by saying that rates could rise in the near future, he is reminding people that interest rates will not stay low for all that long (perhaps a couple of years at most). The result of this could be to encourage more people to take on additional borrowing now, before interest rates increase to a less favourable level. In turn, this could have a positive effect on banks such as Lloyds, RBS and Barclays through higher lending levels and a short-term boost to the UK economy, too.

Looking Ahead

As well as the potential for a short-term boost to lending levels and to the UK economy, RBS, Lloyds and Barclays appear to be undervalued at current price levels. For example, RBS trades on a price to earnings (P/E) ratio of 14.1, Lloyds has a P/E of 10.5 while Barclays has a P/E of just 9.9. Despite there being a considerable range between the three valuations, they all compare favourably to the FTSE 100 which has a P/E of 14.2.

What makes the three UK-focused banks even more appealing, though, is the rate at which they are forecast to grow profits in 2015. Indeed, despite experiencing  highly challenging trading conditions in recent years, the three banks are set to increase earnings per share (EPS) by 17% (RBS), 8% (Lloyds) and 24% (Barclays) in 2015. All three rates of growth are well above the average forecast growth rate of the wider index and, with the potential for a short-term boost from continued ‘limited edition’ low interest rates, RBS, Barclays and Lloyds could be strong performers in future.

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Peter owns shares in Lloyds, RBS and Barclays.