Investors who bet on the global banking sector have had 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, explained: “Bank stocks would benefit from higher rates. This is because they can charge more on their loan products and boost their margins.
“We thought the Bank of England would raise rates earlier this month. But now we are all looking ahead to December, when there will be another meeting.”
Which banks are the best to own ahead of a possible rate rise? Telegraph Money speaks to the experts to find out.
Sophie Lund-Yates, of the broker Hargreaves Lansdown, pointed to Lloyds Bank as a company that was undervalued by investors. “It is far more exposed to traditional lending than other banks, so if an interest rate rise comes down the pipe as expected, it would be even more beneficial,” she said.
Mr Howlett added that aside from the potential margin boost from a rise in interest rates, Lloyds offered an attractive underlying investment case. “It is a market leader across a range of products in Britain,” he said, pointing to its presence in mortgages and savings accounts.
The shares have climbed 35pc so far this year, but are still down 21pc from their 2020 high. “Most banks trade at a price-to-earnings multiple between seven and eight,” Mr Howlett added, referencing a popular metric that indicates how expensive a company’s stock is relative to its profits. Lloyds currently trades at a price to earnings multiple of 8.
“This looks relatively cheap to us, but we think the discount will close soon if the Bank of England does raise the Bank Rate.”