We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Spotlight on European ETFs Ahead of Expected BoE December Rate Cut
Read MoreHide Full Article
Anticipation is mounting among financial experts as the Bank of England (BoE) is widely expected to cut interest rates at its December meeting. According to a Reuters poll conducted in November, nearly 80% of more than 60 economists surveyed now predict the BoE will trim the Bank Rate by 25 basis points to 3.75% — a sharp turnaround from last month, when most still expected rates to remain unchanged through year-end.
While an interest rate cut serves as a welcome breather for common UK citizens, potentially lowering their mortgage repayments and the cost of borrowing, it poses a headwind for the financial industry. In particular, for UK banks like HSBC Holdings (HSBC - Free Report) , Banco Santander (SAN - Free Report) and Allianz (ALIZY - Free Report) , a rate cut might put pressure on their margins.
Banks profit primarily from the Net Interest Margin (“NIM”) — the difference between the interest they earn on loans and the interest they pay on deposits. Lowering the central bank rate typically shrinks this spread. This anticipated impact means investors interested in the European financial sector, especially UK banks, must carefully revisit their asset allocation in exchange-traded funds (ETFs), particularly European ETFs offering heavy exposure to these institutions.
The Rationale Behind the Rate Cut
The urgency for a rate cut stems from a gradual cooling of UK inflation. Notably, the nation’s consumer price inflation has peaked and fallen to 3.6% in October from 3.8% the previous month.
Meanwhile, policymakers have observed that inflation is fading, which is most likely due to slower economic growth and less consumer spending. Moreover, energy bills are rising far less than they did last year, and the rate of price increases for services is also slowing. This general cooldown is driving expectations for easier monetary policy.
Further, the impending UK budget is expected to prioritize stable tax policy and restrain spending, giving the BoE room to lower rates without stoking inflation. To this end, UK Chancellor Rachel Reeves has strongly hinted that her upcoming budget will include measures to further lower prices, aiming to "smooth the path for the Bank of England to cut interest rates."
Will UK Banks Be Significantly Impacted?
UK banks face a strategic inflection point with the BoE expected to cut rates next month. While lower official rates compress the net interest margins that are a key source of bank profits, the sector is proactively adapting.
Major lenders like HSBC, Halifax and Barclays have already begun cutting selected mortgage rates, with some products now offered below 4% for prime borrowers. This pre-emptive move is a calculated strategy to stimulate lending demand ahead of the central bank's decision. By making borrowing more attractive, banks aim to boost loan volumes, hoping that this increased activity will help offset the pressure on per-loan profitability.
Furthermore, a lower interest rate environment can improve overall credit quality by reducing debt-servicing burdens for borrowers, potentially leading to lower loan loss provisions for the banks.
Ultimately, a BoE rate cut presents a mixed picture for individual banks. The direct effect might result in a squeeze of interest income. However, their early actions to cut mortgage rates demonstrate an effort to capitalize on the stimulative effect of lower rates. Their success will depend on whether the resulting growth in lending volume and improved credit health can sufficiently counterbalance the pressure on their margins.
European ETFs in Spotlight
For investors concerned about the varying impacts of a rate cut on individual banks, carefully reviewing their asset allocation in the following European ETFs that offer exposure to UK banks is essential.
This fund, with assets worth $4.02 billion, offers exposure to 84 financial companies in Europe. Its top three holdings include HSBC Holdings (8.00%), Allianz (5.36%) and Banco Santander (5.13%).
EUFN has surged 45.1% year to date. The fund charges 48 basis points (bps) as fees.
This fund, with assets worth $8.11 billion, offers exposure to 219 large- and mid-capitalization equities from developed market countries that use the euro as their official currency. Its top 10 holdings include Allianz (2.33%) and Banco Santander (2.23%).
EZU has soared 29.9% year to date. The fund charges 51 bps as fees.
This fund, with assets worth $56.86 million, offers exposure to 263 large- and mid-sized companies in the European Union countries that have fully incorporated the euro as their national currency. Its top 10 holdings include Allianz (2.35%) and Banco Santander (2.22%).
FLEU has surged 31% year to date. The fund charges 9 bps as fees.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Spotlight on European ETFs Ahead of Expected BoE December Rate Cut
Anticipation is mounting among financial experts as the Bank of England (BoE) is widely expected to cut interest rates at its December meeting. According to a Reuters poll conducted in November, nearly 80% of more than 60 economists surveyed now predict the BoE will trim the Bank Rate by 25 basis points to 3.75% — a sharp turnaround from last month, when most still expected rates to remain unchanged through year-end.
While an interest rate cut serves as a welcome breather for common UK citizens, potentially lowering their mortgage repayments and the cost of borrowing, it poses a headwind for the financial industry. In particular, for UK banks like HSBC Holdings (HSBC - Free Report) , Banco Santander (SAN - Free Report) and Allianz (ALIZY - Free Report) , a rate cut might put pressure on their margins.
Banks profit primarily from the Net Interest Margin (“NIM”) — the difference between the interest they earn on loans and the interest they pay on deposits. Lowering the central bank rate typically shrinks this spread. This anticipated impact means investors interested in the European financial sector, especially UK banks, must carefully revisit their asset allocation in exchange-traded funds (ETFs), particularly European ETFs offering heavy exposure to these institutions.
The Rationale Behind the Rate Cut
The urgency for a rate cut stems from a gradual cooling of UK inflation. Notably, the nation’s consumer price inflation has peaked and fallen to 3.6% in October from 3.8% the previous month.
Meanwhile, policymakers have observed that inflation is fading, which is most likely due to slower economic growth and less consumer spending. Moreover, energy bills are rising far less than they did last year, and the rate of price increases for services is also slowing. This general cooldown is driving expectations for easier monetary policy.
Further, the impending UK budget is expected to prioritize stable tax policy and restrain spending, giving the BoE room to lower rates without stoking inflation. To this end, UK Chancellor Rachel Reeves has strongly hinted that her upcoming budget will include measures to further lower prices, aiming to "smooth the path for the Bank of England to cut interest rates."
Will UK Banks Be Significantly Impacted?
UK banks face a strategic inflection point with the BoE expected to cut rates next month. While lower official rates compress the net interest margins that are a key source of bank profits, the sector is proactively adapting.
Major lenders like HSBC, Halifax and Barclays have already begun cutting selected mortgage rates, with some products now offered below 4% for prime borrowers. This pre-emptive move is a calculated strategy to stimulate lending demand ahead of the central bank's decision. By making borrowing more attractive, banks aim to boost loan volumes, hoping that this increased activity will help offset the pressure on per-loan profitability.
Furthermore, a lower interest rate environment can improve overall credit quality by reducing debt-servicing burdens for borrowers, potentially leading to lower loan loss provisions for the banks.
Ultimately, a BoE rate cut presents a mixed picture for individual banks. The direct effect might result in a squeeze of interest income. However, their early actions to cut mortgage rates demonstrate an effort to capitalize on the stimulative effect of lower rates. Their success will depend on whether the resulting growth in lending volume and improved credit health can sufficiently counterbalance the pressure on their margins.
European ETFs in Spotlight
For investors concerned about the varying impacts of a rate cut on individual banks, carefully reviewing their asset allocation in the following European ETFs that offer exposure to UK banks is essential.
iShares MSCI Europe Financials ETF (EUFN - Free Report)
This fund, with assets worth $4.02 billion, offers exposure to 84 financial companies in Europe. Its top three holdings include HSBC Holdings (8.00%), Allianz (5.36%) and Banco Santander (5.13%).
EUFN has surged 45.1% year to date. The fund charges 48 basis points (bps) as fees.
iShares MSCI Eurozone ETF (EZU - Free Report)
This fund, with assets worth $8.11 billion, offers exposure to 219 large- and mid-capitalization equities from developed market countries that use the euro as their official currency. Its top 10 holdings include Allianz (2.33%) and Banco Santander (2.23%).
EZU has soared 29.9% year to date. The fund charges 51 bps as fees.
Franklin FTSE Eurozone ETF (FLEU - Free Report)
This fund, with assets worth $56.86 million, offers exposure to 263 large- and mid-sized companies in the European Union countries that have fully incorporated the euro as their national currency. Its top 10 holdings include Allianz (2.35%) and Banco Santander (2.22%).
FLEU has surged 31% year to date. The fund charges 9 bps as fees.