One of many strongest areas of the FTSE 100 throughout 2024 has been the banking sector. After a number of years of underperformance through the pandemic and the rate of interest climbing cycle, these shares are topping the index.

5 large 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 Customary Chartered. They usually’ve all carried out effectively this 12 months because the beneath 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.

Immediately, the entire worth of the shares owned in these banks can be £14,690. That’s really phenomenal development, reflecting an enhancing macroeconomic setting and a few supportive traits regarding sluggish financial easing.

Nevertheless, it’s essential to notice that these shares additionally pay sturdy and sizeable dividends. My calculations recommend a median ahead dividend yield round 5% — probably a bit greater — for an funding made at the beginning of 2024.

In flip, these dividends would take the entire 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, probably adopted by two to a few extra cuts all through 2025. Traditionally, such cycles have been beneficial for UK shares, with the FTSE 100 displaying optimistic returns in 4 out of the final 5 cycles, one 12 months after the primary fee lower.

Banks, particularly, stand to profit considerably from this setting. 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 optimistic impacts of upper charges — with out the negatives. As charges lower, banks can scale back curiosity funds on buyer deposits, successfully widening their revenue margins.

A possible standout selection

Lloyds could possibly 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 decreased default dangers in a lower-interest-rate setting. Furthermore, decrease charges sometimes stimulate borrowing exercise, probably resulting in elevated mortgage volumes and related price earnings for banks like Lloyds.

The lender underperformed this 12 months as a result of issues about fines associated to missold motor finance. The precise end result shouldn’t be but identified, however the cash Lloyds put apart for this eventuality will 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 complicated, and elements such because the current Price range’s affect on inflation expectations may 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.