Investor interest is likely to focus on the UK banking sector following the Bank of England’s historic decision to make back-to-back interest rate increases.
The decision to raise the base rate from 0.25% to 0.5% should be positive for the banks which are due to report full year 2021 earnings later this month.
Moreover, given that inflationary pressures are endemic within the economy, there is a reasonable likelihood that interest rates will increase further.
In a rising interest rate environment banks are able to increase their net interest margins, (the difference between the rate at which they fund their lending, and the amount they charge to borrowers).
Research by Jefferies, highlights that NatWest Group (NWG) is the stand out winner from the 25 basis points rate rise, with a 5.5% uplift to its net interest income.
Another potential positive for the UK banks is the ability to make significant capital distributions to shareholders.
According to Numis ‘over the next three years we expect NatWest to distribute over £10 billion of capital equivalent to 37% of its market value. This is on top of the £2.5 billion already committed in 2021.’
