Base Rate Hike Will Boost Demand For Lloyds Banking Group PLC


The Bank of England won’t be hiking base rates this year, but everybody expects it to act in the spring. Governor Mark Carney has dropped a heavy hint that it will happen around then.

If consensus is correct, and one of Carney’s predictions finally hits the mark, this could be good news for investors in the big UK banks such as Lloyds Banking Group (LSE: LLOY), as well as Barclays (LSE: BARC) and Royal Bank of Scotland Group (LSE: RBS).

If you also reckon rates will rise shortly, it might be worth buying these stocks before the BoE acts.

Weighty Judgement

Shares in Lloyds revived this week after HSBC analysts said it could benefit from a modest increase in interest rates. HSBC lifted its recommendation on both Lloyds and Barclays to ‘overweight’, claiming the looming rate rise will spur demand for bank stocks.

The traditional view is that rate rises are bad for banks, but these are strange times. Hiking rates will help banks improve narrow spreads on retail liabilities.

Better still, it won’t trigger a material increase in impairments, HSBC says, because the Bank of England is likely to move slowly. It won’t risk plunging cash-strapped households into the red, or boosting unemployment and business failures, by acting too precipitously.

Getting Down To Basis

Improved interest rates could shake savers out of their lethargy, and get them shopping around for new savings accounts. 

Homeowners who see no reason to remortgage in recent years, because they’re happy on low-cost tracker rates, might suddenly see the merit in shopping around for a fixed rate.

Banks can also return to their old tricks of hiking mortgage and savings rates at a slower pace than base rates. A few basis points here and there can add up to big money, if you’re the size of Barclays, Lloyds and RBS.

The occasional 0.25% base rate hike should be win-win for Lloyds, Barclays and RBS, as all three banks will end up with have a larger UK focus as they pull out of riskier overseas activity.

Lloyds has the most concentrated exposure to the UK retail and business sector, and may therefore be expected to benefit most.

After a tough year for the banks, which has seen the previously vibrant Lloyds share price rise just 3%, Barclays fall 14% and RBS go nowhere at all, this could be a nice filip.

Fresh Challenge

There are a couple of provisos. First, the big boys face fresh competition in the shape of new challengers such as Metro Bank, M&S, Tesco Bank, TSB and Virgin Money, who will also be battling to win new savings and mortgage business (although their current offerings haven’t exactly been dazzling).

Another worry is that an ongoing investigation by the Competition & Markets Authority could break up the big four’s current account stranglehold, which would hammer their share prices.

When Doves Cry

Finally, there is also the danger that base rates won’t rise. I do wonder whether markets are running away with themselves, and that first hike is further away than most people think.

At the US Federal Reserve, the balance has now swung back in favour of the doves. That may happen in the UK as well, as growth expectations and house prices slow, and the eurozone malaise continues. 

Neither the US or UK want to to see the value of their currencies shoot up thanks to a base rate hike. There is even an outside chance that rates could stay low for year after year, pace Japan.

A base rate hike will boost demand for Lloyds, Barclays and RBS, but only if rates actually do rise.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.