The UK’s Banks may not be among this week’s UK Index winners but technical signals and supportive messages from some major financial institutions means we can find reason to be bullish on the sector’s near-term prospects. What is it we are focusing on? What makes us consider Barclays, HSBC, Lloyds, RBS and Standard Chartered as short-term trading opportunities?

Firstly, most of the UK-listed Banks have seen a bounce off rising support trendlines that could allow them regain their most recent highs representing potential gains of 3-11% over the next month or so. And while this can be enough for some, it’s better when the story stacks up with the technicals.

So, secondly, given the way banks work, any chance of higher interest rates from major central banks like the US Federal Reserve (Fed), Bank of England (BoE) and/or European Central Bank (ECB) could help bolster profitability. Banks make money by charging more for loans than they pay for deposits. This is known as the Net Interest Margin (NIM); a key metric in banks financial results. And if better margins mean better profits, that could mean better dividends for shareholders, which can boost share prices.

The message from the big UK banks in late Feb was that NIMs were mostly improving. And whilst the story for each bank is slightly different there is high potential of a Fed rate hike next week which could boost these margins and sentiment further, the US economy doing well and warranting policy normalisation after almost of decade of life support.

UK pricing pressure on account of a Brexit induced weak GBP also means the BoE might even be forced to hike if inflation starts blowing too hot. This could help the UK banks even more than a Fed hike. And yesterday saw ECB President Draghi strike a less dovish tone, suggesting the need for further rate cuts in the Eurozone was likely off the agenda, deflationary risk gone. So our trio are talking more positively and more hawkishly. Which is good for the banks.

It implies the worst is behind us in terms of financial crisis. It also adds to global rhetoric of an improving economic picture. And whilst we have grown to love low rates (even negative in Europe), and very loose central bank policy, we also know that the central banks will only dare move towards tighter policy and rate hikes if they are very sure that their respective economies are on a surer footing and can deal with it.

Anyway, rates are still so low that any moves are pretty limited, meaning the cheap money party is still technically in full swing with plenty of life left in it yet. Even if the Fed does hike next week. Which is good for the banks.

If you like what you’ve read, this analysis chiming well with your information gathering before trading or investing, get access to it here to ensure you have it available to you each and every day. This is only a snippet. There’s a lot more available to clients.

As always – have a great weekend!

Mike van Dulken, Head of Research, 10 Mar 2017