Lloyds Banking Group PLC (LSE:LLOY) and NatWest Group PLC (LSE:NWG), the FTSE 100 lenders most exposed to the British economy are due to report results in the coming days, amid a finely balanced debate on the Bank of England‘s next few interest rate decisions.
Recent statements from some senior members of the BoE’s monetary policy committee, including governor Andrew Bailey, has led markets to price in a first rate hike as soon as the meeting on 4 November.
The market is also prising for four more rate hikes by the end of 2022.
Against this backdrop, and following results from UK rivals Barclays and HSBC, shares in Lloyds are up 7% over the past month and 69% over 12 months, while NatWest’s are up 6% and 92% over the same period.
Lloyds Banking’s third-quarter results on Thursday seemingly has the most scope for disappointment, lacking the investment bank operation that powered Barclays and the US banks forward over the third quarter.
Worries over the impact of rising living costs and how that affects bad debts and the prospect of an interest rise have hurt the share price, but net income is tipped to be well up in these numbers helped by growth in mortgage and unsecured loans.
It is also new Lloyds chief executive Charlie Nunn’s first outing, so brokers expect a conservative view on dividends with the strategy going forward to be outlined with the full year results.
Key within results will be assessing how those benefits are reinforced by a potentially larger rate hedge and offset by the significant decline in flow mortgage spreads, said UBS.
Investors might also want to reconsider the likelihood of five rate hikes between now and December 2022.
This looks “a clear overshoot”, said Berenberg’s strategists, who were not the only ones to feel this way.
“Our economists expect a first rate hike in December, followed by two further rate hikes in 2022.”
However, Berenberg’s economists acknowledge the BoE is seeking to raise rates soon and continue to think there is upside to short- and long-term UK bond yields.
Rising yields would have significant implications for equity markets, the strategists said cyclical and value sectors such as banks and energy have the best macro skews to rising rates, with Berenberg seeing NatWest as likely to benefit most, with around twice the interest rate sensitivity of Lloyds.
Other economists, such as those at ING, see two rate hikes between now and the end of next year, taking the Bank Rate to 0.5%.
Some economic factors may even push an interest rate rise into next year.
“The Bank’s rate setters will want to see what the economy looks like after the sticking plaster of furlough has been properly removed, and how much legs the energy price crunch has left,” said analyst Laith Khalaf at AJ Bell.
“The Bank may well be wary that rising energy costs will act as a brake on economic growth, which will do a similar job to an interest rate hike, thereby alleviating the need for tighter policy just yet.”