Picture supply: Getty Photographs
One of many strongest areas of the FTSE 100 throughout 2024 has been the banking sector. After a number of years of underperformance throughout the pandemic and the rate of interest climbing cycle, these shares are topping the index.
5 massive winners
There are 5 banks listed on the FTSE 100. So as of market worth, these are HSBC, Barclays, NatWest Group, Lloyds (LSE:LLOY), and Normal Chartered. They usually’ve all carried out nicely this yr because the under desk exhibits.
As there are 5 shares, I’ve cut up the £10,000 5 methods, assuming a £2,000 funding in every of the banks.
| Share value progress in 2024 | Return on £2,000 | |
| HSBC | 18.3% | £2,360 |
| Barclays | 71.2% | £3,424 |
| NatWest | 86.4% | £3,728 |
| Lloyds | 10.6% | £2,212 |
| Normal Chartered | 48.3% | £2,966 |
Right this moment, the full worth of the shares owned in these banks can be £14,690. That’s actually phenomenal progress, reflecting an enhancing macroeconomic surroundings and a few supportive developments referring to sluggish financial easing.
Nevertheless, it’s necessary to notice that these shares additionally pay sturdy and sizeable dividends. My calculations counsel a mean ahead dividend yield round 5% — probably a little bit increased — for an funding made initially of 2024.
In flip, these dividends would take the full returns to round £15,190. That’s a 51.9% return in lower than 12 months.
Will these banks proceed to win?
As we glance in the direction of 2025, the FTSE 100 banking sector seems poised for continued outperformance, pushed by the anticipated rate of interest cuts and their distinctive positioning to capitalise on this financial shift.
The Financial institution of England’s anticipated to proceed its rate-cutting cycle, with forecasts suggesting a discount from the present 5% to 4.75% within the close to time period, doubtlessly adopted by two to 3 extra cuts all through 2025. Traditionally, such cycles have been beneficial for UK shares, with the FTSE 100 exhibiting constructive returns in 4 out of the final 5 cycles, one yr after the primary fee lower.
Banks, specifically, stand to profit considerably from this surroundings. They make use of structural hedges by investing in long-term bonds when charges are excessive, securing sturdy yields for the long term and increasing the constructive impacts of upper charges — with out the negatives. As charges lower, banks can cut back curiosity funds on buyer deposits, successfully widening their revenue margins.
A possible standout selection
Lloyds may very well be a standout selection regardless of underperforming its friends. With its substantial mortgage portfolio — the UK’s largest — Lloyds is well-positioned to profit from lowered default dangers in a lower-interest-rate surroundings. Furthermore, decrease charges usually stimulate borrowing exercise, doubtlessly resulting in elevated mortgage volumes and related charge revenue for banks like Lloyds.
The lender underperformed this yr as a result of considerations about fines associated to missold motor finance. The precise consequence will not be but identified, however the cash Lloyds put apart for this eventuality might not be sufficient.
Nevertheless, it’s essential to notice that whereas the banking sector averaged spectacular 33% returns throughout previous rate-cutting cycles, previous efficiency doesn’t assure future outcomes.
The financial panorama’s advanced, and elements such because the current Finances’s influence on inflation expectations might affect the tempo of fee cuts. Personally, I keep a place in Lloyds however gained’t add to it as a result of focus threat.
