2 growth stocks benefitting from the Bank of England’s interest rate hike

These cash kings will see earnings rise as interest rates increase for the first time in a decade.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It may have been only a 25 basis point increase in the reserve rate to 0.5%, but the Bank of England’s decision to hike interest rates for the first time in a decade will still have repercussions for the broader economy, investors and many stocks. Two that will benefit from rising interest rates are share registrar Equiniti (LSE: EQN) and challenger bank Metro Bank (LSE: MTRO).

Cash king 

Equiniti should benefit as, aside from its core share registration business, it also offers a bevy of related critical but non-core technology applications to more than half of the FTSE 100. That includes pension administration, employee share plans, regulatory compliance software and payroll solutions.

Some of its many offerings mean it holds a significant amount of cash for clients. In H1 2017 it held some £1,700m of client cash on its balance sheet and received £4.7m in income from investing this cash in short-term securities. This income was 19% lower than the year prior due to the BoE’s rate cut in August 2016 following the Brexit vote. And while two-thirds of this cash is invested in fixed rate securities, Equiniti will see rising income from the rest as we go forward.

Should you invest £1,000 in Tesco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco made the list?

See the 6 stocks

Now, Equiniti also has roughly £450m in debt, so it will see interest payments rise for any portion of this debt that has a floating rate. However, this debt level is comfortable for the firm due to its steady recurring revenue, high cash flow and the fact that £120m of it is related to the recent acquisition of Wells Fargo Share Services. This deal has made Equiniti the third largest provider of such services in the US and marks its entry into the world’s largest market for them.

Equiniti’s share price has risen by 55% over the past year and its shares are now priced at a full 19 times forward earnings. That said, I see plenty to like about the firm and believe it has stellar growth prospects as it cross-sells its array of services into the US and builds on its dominant market position in the UK.

A most welcome surprise 

As a pureplay retail bank, interest rates are very important for Metro Bank (LSE: MTRO) as it gives the company more room to increase the spread between the interest rate at which it borrows money, ie deposits or corporate borrowings, and the rate at which it lends it out.

Taking the difference between these two and then dividing by the bank’s total interest-bearing assets is referred to as the net interest margin (NIM), and with interest rates at rock bottom levels for years, banks’ NIM have been very low. Indeed, in the quarter to September, Metro Bank’s statutory net interest margin fell from 1.95% to 1.94% year-on-year.

However, this figure is a bit distorted by the BoE’s own term funding scheme. The bank’s underlying NIM based purely on its main source of funding going forward, actual customer deposits, was a heartier 2.22% and was growing even without the interest rate hike. Needless to say, this semi-unexpected rate hike should further benefit this metric.

There’s plenty of other moving parts to consider with fast-growing Metro Bank, but with interest rates rising and a compelling rollout plan, I’ll follow the challenger bank closely, even if its 3.92 price/book ratio has it very, very highly valued.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Tesco right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Tesco made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of Equiniti. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of British bank notes
Investing Articles

£20,000 in savings? Here’s how it could be used to target a £913 second income each month

Christopher Ruane walks through some practicalities of how an idle £20k could be the foundation for a sizeable long-term second…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

5 steps to building monthly passive income with a spare £10k

Christopher explains how an investor could aim to use some spare cash to start building regular passive income streams through…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »