The American investment bank Jefferies thinks the market is ignoring the potentially beneficial impact of a UK interest rate rise on the fortunes of the nation’s major High Street lenders.
Already the mood music from the Bank of England has led to a steepening of the yield curve, while a hike to base rates is expected to boost the earnings and return on equity of the likes of Royal Bank of Scotland PLC (LON:RBS) and Lloyds Banking Group PLC (LON:LLOY).
In fact, Jefferies has moved its recommendation on stock in the former to ‘buy’ from ‘hold’ and reckons the shares are worth 306p each (current price 265p).
Quarter point rise
Factoring in a quarter of a point rise in the base rate in November, RBS’s pre-tax profit will be boosted by 10%, based on the Jefferies model. This leaves the company less reliant on the capital markets division of its unit NatWest.
“As a result we can no longer sit on the fence,” Jefferies said.
It has also raised its target price for Lloyds to 91p from 87p (current price 66p) and remains a ‘buyer’ of the shares. It expects the bank’s net interest margin to hit 3% by 2019.
According to Jefferies, there just wasn’t enough to prompt an upgrade of Barclays PLC (LON:BARC).
“The modest increases we put through our domestic revenue yields were offset by downgrades to capital markets revenues,” it said, keeping its call at ‘hold’ and its price target at 216p.