Banks prosper amid best-performing FTSE stocks of 2024

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Banks were among the best-performing UK shares this year as elevated interest rates provided a boost to the sector, despite concerns over the domestic economic recovery.

Shares in NatWest delivered the highest returns this year to the middle of December, rising 101 per cent including the price increase and dividends, according to investment site Hargreaves Lansdown. Barclays was the fifth best-performing stock, with an 81 per cent rise.

The UK lenders have been buoyed by higher interest rates, which were cut in August after nearly a year at 5.25 per cent. This elevated level has allowed them to generate attractive net interest margins — the difference between the amount they pay out on loans and earn on deposits.

Analysts argue that banks have also benefited from a benign economic environment in which few people have defaulted on loans — a positive for lenders. However, the outlook for the economy is mixed. Although the IMF upgraded its forecast for UK economic growth in October, recent figures point to the second consecutive monthly slowdown in October.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said that NatWest in particular “has been on a roll” this year, pointing to its third-quarter trading results, which beat expectations.

“With rates expected to stay a bit higher for longer, that’s building in improved underlying performance as it keeps net income margins more robust,” Streeter said. She added that Barclays has also benefited from lower-than-expected bad loans, adding that the bank has “a good grip on costs.”

Standard Chartered was also among the top ten performers this year, increasing 54 per cent on a total return basis.

Aside from banks, “recovery” stocks — those that have the potential to bounce back after a fall — have also performed well. John Moore, senior investment manager at wealth manager RBC Brewin Dolphin, pointed to aerospace company Rolls-Royce and British airways owner IAG. The shares have risen by 94 per cent and 84 per cent respectively on a total return basis.

“Rolls-Royce might just be the poster child for ‘recovery’ not just this year but for the decade,” said Moore. “For some, the business looked to be in a very difficult position but refocus and improvements in the civil aviation and defence areas has turned the cash generating burners on.

“The continued recovery and momentum in aviation has also helped IAG which has, as a result, been able to increase its yield per passenger and despite prioritising investment and a strong balance sheet, has still found surplus profit to pay a dividend for the first time since 2019.”

Richard Hunter, head of markets at Interactive Investor, added that the British Airways owner was “now firmly in the ascendancy”, noting that the surprise announcement of a €350mn share buyback programme in November was a further reflection of its strong recovery.

“Indeed, the shares remain down by 30 per cent over the past five years to pre-pandemic levels, but the scope for further recovery is strongly in evidence given the price performance over the past two years, with the shares having gained 127 per cent,” he added.

Corporate takeovers have featured prominently this year, helping to buoy the share prices of Hargreaves Lansdown, which was bought by private equity firms including CVC Partners, and packing company DS Smith, which was snapped up by US operator International paper. Shares in Hargreaves Lansdown are up 56 per cent this year while DS Smith has risen 85 per cent, putting both in the top ten performers.