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No.
Is the general thought that when U.S. Raise the interest rates UK banks share price are going to drop?
Yes JPM was referring to the US market only, that was the example I put forward as that's where the interest rate rise is. But I hear what you are saying. As I say will watch closely and see how the rate rise effects US banks. We will probably follow in the summer. JEM
JPM was referring to the American Market only. The US Mortgage Bank Model differs vastly to the UK Mortgage Market. They make their profits by selling their loans into the secondary market to banks like RBS. We all know what happened to RBS in 2008 as a result of this practice
In the past higher interest rates have generally been good for banks. I was only merely pointing out the downside, and the possible consequences of higher interest rates on the UK economy and banking system at present. However today we live in a very different world from the past both in political and financial terms. The world economy is still on a knife edge and any sudden jolt to the International Monetary System like higher interest rates could send the world economy into irreversible decline. You are right RBS are as cheap as chips at the moment, until the litigation issues have been clarified they will remain so, An 100% rise in the share price from to days closing price of 28P in the next 18 months will do for me.
if a 0.25% rise in interest rates will cause mortgage and company loan defaults I would be amazed. Remember to most mortgages are fixed rates for 2, 3 to 5 years. As I said previously JPM have stated that a 1% rise would generate $2.80 billion in extra income, don't take my word for it, Google it. We are now entering a new phase of normalised interest rates, possibly about 1.5 to 2% in a couple of years. Remember banks are much leaner now than pre 2008 and with the extra income generated by interest rate rises will be a massive boost to profits. The good thing to is they don't have to do anything to benefit from this income, no extra staff etc., just pure profit. As I said previously, an interest rate rise for banks is the same as an oil price rise for oil companies. Much as I would like to claim that I made up this statement. It is a well known statement in financial circles. How can an extra $2.80 billion a year (JPM for 1% rate) be a bad thing. It's a no brainier. Let's wait and see then what effect it has on US banks share prices. JEM
200 to 300% rise in 18 months , .......in your dreams . What makes you think the markets are calling it wrong with the banks ?
A rise in interest rates is bloody good news for all Banks ... 90% off loans are in USD Banks will be making bigger profits ..... IMHO I am amazed Banks have fallen ... Market Markets are calling this wrong with Big Banks like RBS ... BIG TIME 28p old Money CHEAP AS CHIPS RBS is the next Black Horse 200% to 300% with 18 months rise
Higher interest rates usually lead to a fall in an economies Aggregate Demand (Growth and Spending) resulting in higher individual consumer and company debt repayments, which ultimately then leads to more mortgage and company loan defaults, and failures, racking up huge liabilities for the Banks absorb not to mention higher unemployment and Government debt repayments and lower tax receipts and exports. These are some of the reasons why there have been no calls for a rise Interest rates over the past 82 months.
I like the idea of doubling in 4/5 years but have reservations that it could be that quick when interest rates are so low and likely to remain low (ish). What might help will be the removal of all the causes of litigation, etc., which should mean that everything the bank does should be unfettered and much more efficient resulting in higher margins.
True to say the banks would have an increase in earnings as their margins increased but other factors come into play regarding overall profits . My worry , for the UK , is that our economic recovery has largely been based on debt related consumer spending , the housing market , low bank rates and oil prices. While I agree that bank earnings will increase with a rates rise, the housing market may slow as mortgages become dearer and consumer spending could contract as borrowing costs increase.Hope Osborne's taking into account the increase in interest payments on the national debt . At some point , when the US and China stop slugging it out , oil prices will rise as will inflation ,further slowing spending . I just find it a very mixed picture at the moment . I'm not saying your wrong ,, lol...I don't know enough about it . As you say ....time will tell.
I have a couple of observations: You've said 'All banks have basically struggled in this low interest rate environment' as though one has led to the other but I'd argue that the banks have struggled regardless of interest rate conditions. RBS' trading poor performance hasn't been the result of low rates but the terrible circumstances it found itself in post- bailout. Your point about higher rates directly increasing bank profits is an interesting one but is it actually true? Your implication is that a rate rise acts as a multiplier on profits; ie the higher the rate, the higher the rate of profit but I'd like to know how I could confirm it. Certainly in Australia recently, major banks have been raising their mortgage rates independently of the central bank base rate, which would appear to confirm what you've said. I think you are right that a close watch on the effect of the Fed's rate rise on bank share prices will be interesting and possibly indicative for us.
All banks have basically struggled in this low interest rate environment. Interest rate rises are the key IMO. Yes there are other factors, litigation, ring fencing, stress tests, world events out with our control etc. etc. but all that aside (yes all that could have a big effect), increased profit on higher interest rates means bigger dividends. This in turn attracts more institutional investors, leading to a hopefully higher share price. I suppose at the end of the day it is not rocket science. Let's see what happens to the US banks share price after Yellen's announcement next week, even though it is almost certain. Still think you will see a good 2 to 3% rise and with further rises a gradual re-rate of US bank shares. This historically has been the case with interest rate rises previously. Hopefully we may see a bit rub off on GB banks. Just my humble opinion and respect others views. As they say, time will tell. JEM
Not that I know much about economics but are you not oversimplifying ?
Yes I do, given an interest rate of around 2% in two years time. Remember the higher the interest rate the more profit RBS will make, that is a given. It would easily add a billion pounds a year to RBSs bottom line (probably more). When interest rates are normalised (for want of a better word), it will be the banks time again. JEM.
You really think the banks will double in value in 4 to 5 years ? ......Interesting points of view .
Yes agree. While a gradual rise in interest rates over the next couple of years to say around 1.5 to 2% will not help mortgage payers etc. It will be a good thing for savers and assuming a normalisation of inflation to around 2% it will in the end help people with mortgages. Normal inflation means a healthy rise in wages and house prices. People can then see their property increasing in value, which helps the economy with people moving or renovating their existing property, in other words spending. Zero inflation helps no one. Obviously banks will benefit greatly with higher interest rates. If we do have an interest rate rise starting in the middle of next year and rising gradually to the rates mentioned above, could easily see all the banks doubling in value in 4 to 5 years. Just my opinions. JEM
Fair enough. There is an argument that after a long period of extremely low rates the central bank should prepare people for normalised rates by gradual increments at the lowest levels. I think we will see it here; perhaps less than .25% rises.
Higher interest rates are the biggest earners for banks. An interest rate rise for banks is equivalent to the oil price going up for oil company's. For instance JP Morgan have said that a 100 basis point rise would add $2.80 billion profit per annum. $700 million for a quarter % rise, not bad. When Yellen raises interest rates by 25 points next week, (100% certain) it won't stop there, it is expected they will rise by 25 basis points every quarter, this time next year will see it around 1%. Not sure how much it will help RBS and other GB based banks but am sure they do a lot of US and dollar related business. JEM
Your probably right mate , meant to post could be good for banks as opposed to should be ,I was anticipating a short term positive effect but it might not happen and as you rightly pointed out with oil and commodities likely to slide even further the SP could continue to drop .I'm still not entirely convinced they will raise rates , their inflation figures are still pretty low . I'm probably totally wrong , I'm sure Yellen knows what she's doing .
Don't disagree with your view to be fair. My personal view is that is likely to waffle around here up and down four to five pence. January in my view will be where this share will start to make stronger gains, many investor currently are pulling out the market before Xmas and keeping it as cash, next year they will plow all that back In And will be looking for shares like rbs/Lloyd/barc as a safe bet to make gains
In fact, I'd be more worried that the general slide across the ftse continues because it will drag RBS down regardless of an absence of poor RBS- specific news.For example, as far as I can see, there are no signals yet that the slide in commodities prices, particularly oil, is set to stop. Today may well be just a brief pause and the sp closes below 290.
Ah yeah of course, not sure what that will do to the shares here though. I been in rbs for years and got an average over 400p. I have recently put on a spread trade for this to rise with a 6 month time period. Can't see it going any lower that current levels unless there is disastrous news!
A US rate rise would make assets owned by RBS in the US less valuable but would make US currency held by RBS more valuable. Bit that's all I can think of.
And pardon my ignorance, but why might a rate rise in the US be good for UK banks?