The Daily Telegraph - Saturday - Money
Banks will profit from rising interest rates – and so can you
Investors who bet on the global banking sector have enjoyed a strong year. The industry has delivered returns of 37pc in 2021, beating the MSCI World Index – which tracks the biggest companies globally – by 17 percentage points.
But investors could still find further profit in this industry. Thanks to persistently high inflation, global central banks are now on the verge of increasing interest rates.
William Howlett of the wealth manager Quilter said: “Bank stocks would benefit from higher rates. This is because they can charge more on their loans and boost their margins.
“We thought the Bank of England would raise rates earlier this month. But now we are looking ahead to December, when there will be another meeting.”
Sophie Lund-Yates of the broker Hargreaves Lansdown pointed to Lloyds Banking Group as a company underval
ued by investors. “It is far more exposed to traditional lending than other banks, so, if an interest rate rise comes as expected, it would be even more beneficial,” she said.
Lloyds shares have risen by 35pc so far this year but are still 21pc below their 2020 high. Nick Purves, who co-manages the £888m Temple Bar investment trust, highlighted NatWest as another potential beneficiary of higher rates. “It has got a chequered past,” he said. “But it has massively simplified its business and it has a significant amount of excess capital that it will be able to return to shareholders in the coming years.”
NatWest’s share price has gained 42pc so far in 2021, but also trades below its 2020 high, lagging by 6pc.
Mr Howlett highlighted Barclays as a beneficiary of a rise in interest rates. The stock trades at a relatively low price-to- earnings ratio of six, a metric that shows how expensive a company’s shares are relative to profits, but a robust recovery this year has meant the share price has regained the ground it lost during the pandemic.