British lenders from Lloyds Banking Group PLC (LSE:LLOY) to NatWest Group PLC (LSE:NWG) are set to benefit from further rises in interest rates as the Bank of England strives to curb inflation.
“Financials and value stocks tend to outperform in periods of rising rates,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management. “We advise investors to prepare for higher rates.”
The comments come after the BoE lifted its base rate to 0.75%, back to the level before the coronavirus pandemic-induced cuts.
Banks’ net interest margins can typically gain as they pass on the rates and boost their margins on the amount they charge for lending.
Lloyds and Santander were among the high-street banks to quickly bump up their rates after the decision in Threadneedle Street.
It's worth noting that there is some downside for lenders, as more expensive loans raises the spectre of potential defaults and bad debts.
But UBS banking analyst Jason Napier writes that 80% of loans are on fixed deals, “slowing the transmission of higher rates to households” and he sees banks as attractively valued.
Still, the rate change comes as Britain faces a cost of living crisis from consumer price inflation up more than 5% in January and even higher energy costs on the way after Russia’s invasion of Ukraine.
Indeed, the Bank of England reckons inflation could hit 8% in the coming months.
The strain on UK households means that expectations for rapid further rate rises have been curbed somewhat, as the BOE walks strives to control inflation without hobbling economic growth.
Even in this environment, another rate rise is still on the cards. Anna Titareva, an economist at UBS notes that the central bank may make another hike in May.