From what I’ve been studying, the UK may benefit from 4 curiosity cuts subsequent 12 months from the Financial institution of England financial coverage committee. Decrease rates of interest ought to assist to gasoline financial development, as shoppers have extra of an incentive to spend relatively than save.

Nonetheless, it won’t be excellent news for Lloyds Banking Group (LSE:LLOY). Right here’s what might occur to the Lloyds share price subsequent 12 months.

Why the impression is damaging

It’s true that in a fee lower cycle, the inventory market tends to do nicely. But this isn’t true for all sectors. For main banks, low rates of interest are literally a nasty factor. The important thing method for a traditional financial institution to earn cash is to pay curiosity on deposits and lend it out at a better mortgage fee. The distinction between what’s paid on the deposit and what’s charged on the mortgage known as the online curiosity margin.

The Q3 internet curiosity margin for Lloyds was 2.95%. That is with the bottom fee at present at 4.75%. Now let’s think about (in concept) that the rate of interest fell to 2% tomorrow. Rapidly, the online curiosity margin for Lloyds turns into a lot smaller (in all probability round 1%).

After all, rate of interest cuts might be in gradual 0.25% increments subsequent 12 months. The impression on revenue would be the identical. However basically, I’d anticipate the online curiosity margin this time subsequent 12 months to be decrease than the place it’s now.

Lloyds generated complete internet revenue of £12.7bn in Q3. Of this, £9.6bn got here from internet curiosity revenue. So clearly there might be a damaging earnings impression of decrease curiosity margins. In flip, this might trigger the share price to fall, as buyers consider decrease earnings.

Discussing particulars

The monetary impression on Lloyds isn’t all the time fast. It might take time for fastened fee loans to run out, with some clients additionally having fastened deposit fee offers. So adjustments to the online curiosity margin can take a number of quarters to filter by way of.

Additional, the financial institution’s capable of forecast the longer term internet curiosity margin to some extent. For instance, for Q4, the financial institution anticipate the margin to be above 2.9%. I’d anticipate the annual outcomes launched early subsequent 12 months to element the forecast for the online curiosity margin for 2025. It will permit buyers to resolve whether or not the scale of the damaging impression is sufficient to make them need to promote or purchase the inventory.

Lastly, buyers aren’t silly. Most will pay attention to the hit from a discount in charges subsequent 12 months. So a number of the impression’s already factored in to the present share price.

Offsetting components

Provided that the inventory’s up 20% over the previous 12 months, the priority round fee cuts isn’t a catastrophe (thus far) for Lloyds.

One cause for that is {that a} decrease base fee will stimulate financial exercise. This might be within the type of increased transactions, extra demand for mortgages and different merchandise. Income from all of this may improve for the financial institution. This could assist to offset a number of the fall in income.

In the end, I consider development in Lloyds shares might be stunted subsequent 12 months as a consequence of financial coverage actions. I received’t be investing proper now. However it’s true that the precise dimension of the impression might be low sufficient to be tolerated by present shareholders.