Proactive Investors - The UK's major banks, notably Natwest (LON:NWG) and Barclays PLC (LON:BARC), are expected to remain robust in the wake of the Bank of England's (BoE) decision to maintain current interest rates, according to JP Morgan.
Although the central bank's governor hinted at potential future rate reductions if inflation pressures subside, this is unlikely to negatively impact the banks significantly, the American investment bank said.
This is partly due to positive developments in net interest margins (NIM), a key profitability indicator that measures the difference between interest income generated and interest paid out to lenders.
JPM's report highlights that while lower short-term rates might typically hurt bank profits, the upcoming maturation of low-yield structural hedges in 2025 and 2026 will counterbalance this effect.
For Natwest, for example, these hedges are set to roll over from a yield of just 0.5% to between 3% and 4%, which could boost its financial standing.
JPM also notes that variables like deposit pricing and mortgage competition will influence net interest income going forward.
Despite a static base rate, anticipated at an average of 4.25% for the next years, the UK banks show only modest sensitivity to short-term rate fluctuations due to their structured hedges and asset-liability management strategies.
Moreover, the potential for lower interest rates is seen as a positive driver for loan growth and overall credit quality, expected to improve consumer and business confidence. This, coupled with a gradual increase in deposit betas—indicating the percentage of rate changes banks pass to depositors—could further stabilise the banks' financial outlook.
In early trading, Barclays shares were steady at 212.75p, while Natwest stock was similarly becalmed at 318p.