The UK Index Banks were back in focus this week. Not because investors are any more optimistic about the UK economy – we have political and Brexit uncertainty to blame for that – it was more to do with heightened expectations of the Bank of England hiking UK interest rate rise as soon as August for the first time since the financial crisis. Bad news for your tracker mortgage, perhaps. Great news for shares in whoever’s lending to you. Which would be the banks.

Banks’ profitability, on their lending operations anyway, is measured by their Net Interest Margin (NIM). This is the difference between what they charge you to borrow and what they pay you on your savings.

With UK interest rates still at historic lows, any move higher for rates could be a real boon for banking sector profitability (they can pay more on savings, but charge more on borrowings).

Especially as they are already doing OK post-crisis, having cleaned up innovated and recovered. Even more so if it is the first in a series to tame elevated and still rising UK inflation (blame a Brexit weakened Pound Sterling), now uncomfortably above the Bank of England’s (BoE) mandated 2% target.

Last week, the Bank of England’s Monetary policy Committee (MPC) voted 5-3 against a rate hike in June – nothing new in them keeping rates at historic lows – but it was a much tighter vote than expected (previously 7-1). In fact it was closest the committee has come to a hike in almost 10 years which makes it very significant.

This week in a speech, BoE Governor Carney reiterated his uber-dovish stance, saying ‘now is not the time to raise interest rates’ with inflation rising but wage growth still anaemic. Outgoing member Forbes also gave it one last crack of the whip with her usual hawkish rhetoric.

The real chat however came from the bank’s Chief Economist, and hitherto dove, Haldane who said he was close to voting for a hike, meaning he could replace the soon to leave Forbes to keep voting tight and closer to a hike. And the replacement for ousted member Hogg could sway things further depending on which way he/she leans. Having been so Fed focused for so long, domestic monetary policy has become much more interesting for the UK investor favourite: the banks.

And this almost refreshing bout of hawkishness comes perfectly timed with the UK banks shares trading around key price levels;

• Lloyds Banking (LLOY; biggest UK mortgage book) is hovering just above 12-month rising support at 66p, offering 10% upside to recent 73p highs.
• RBS (RBS; biggest UK business bank) has found twin support at 244p (12-month rising support + Apr 24 lows) which could deliver 10-11% profits if it recovers the 270p highs traded in May.
• Barclays (BARC) is about to show us whether 193p is support and gains of 8.3% are on offer via a rally back to the ceiling of a 4-month channel.
• For a copy of the charts, to see the trends we have discussed, email inf[email protected]

Three nice short-term bullish trading opportunities on offer, which could be helped along by further elevated UK inflation prints (pressuring the BoE to act) as well as more hawkish comment from the Bank of England members that sees investors and traders price in a higher chance of a UK rate rise in the coming months. Which would help UK banks. And their shares. And you the trader/investor.

To stay ahead with news, views and technical set-ups for the UK Index banks, access our research here. Profit from helpful charts and analysis to help you trade and/or invest. You’ll soon understand why we were voted Best CFD Research Service in April and have held the Best CFD Provider title since 2009.

As always, enjoy your weekend

Mike van Dulken, Head of Research, 23 Jun 2017