Britain’s listed banks have had a bit of a tear-up in recent hours. Take Lloyds Banking Group (LSE: LLOY) for example. The FTSE 100 firm rose by around 6% in Thursday business.
Investors piled in after the Bank of England yesterday gave lenders six months to prepare for the introduction of negative interest rates. This doesn’t mean they’re likely to happen. Policymakers at Threadneedle Street said that “the Prudential Regulation Authority’s engagement with regulated firms had indicated that implementation of a negative Bank Rate over a shorter time frame… would attract increased operational risks.”
Many traders and investors actually believe that the chances of negative rates being introduced has lessened considerably. And this explains why UK share investors have been busily buying up Lloyds and its peers. Negative rates are bad for banks because it damages the difference between the interest rates at which they lend to their customers and the rates they offer savers. This in turn has a detrimental impact on their net interest margins and consequently profits.
No “signal” on negative rates today insists @bankofengland
But put its implication of no negative rates for at least 6 months (to enable banks to get ready) & projection for decent economic bounceback in H2 2021 and it’s little surprise you get this reaction from market ? pic.twitter.com/dWjUT2i1Vw
Ben Chu (@BenChu_) February 4, 2021
More good news!
The news surrounding negative interest rates wasn’t the only thing to boost sentiment for Lloyds on Thursday. Yesterday, Professor Andrew Hayward of the Scientific Advisory Group for Emergencies (or Sage) also predicted Britain will be “more or less back to normal for summer.”
This is music to the ears of UK-focused cyclical shares like Lloyds. The banking sector has been forced to stash away billions of pounds to cover bad loans in the wake of the Covid-19 outbreak. Lloyds itself put aside £3.8bn worth of impairments in the first half of 2020. And it probably faces a tsunami of extra bills — not to mention the problem of extended revenues weakness — if the pandemic stretches well into 2021.
I won’t be buying Lloyds
It’s clear that the outlook for Lloyds and its peers has got a bit stronger in recent hours, then. But I’m not breaking out the bunting just yet. I certainly won’t be buying the FTSE 100 firm for my Stocks and Shares ISA any time soon.
Big questions still persist over the efficacy of vaccines in the fight against Covid-19. Vaccines rollout in Britain has been impressive and 10m citizens have already been jabbed. However, the emergence of new variants — which could be partially immune to these medicines — could still throw a spanner in the works of the economic recovery. One government minister estimates that there could be 4,000 Covid-19 strains out there.
This scenario would naturally devastate trading at Lloyds and might well lead to negative interest rates. But let’s say for a second that this doesn’t happen. There’s still no guarantee that the Bank of England will raise rates any time soon. The fallout from Covid-19 and Brexit will likely take years to tackle. And this will mean that margins at Lloyds will likely remain under significant pressure. I’d much rather buy other UK shares for my ISA today.
