Many sectors are likely to have their returns hit by higher interest rates in coming months, but conversely, financials companies are set to benefit from tighter monetary policy, according to Karen Ward, chief market strategist of Europe, Middle East, and Africa (EMEA) at JP Morgan.
She said that the financials sector is one of the few areas that could benefit from rate hikes whilst many other businesses have their inflows squeezed by central banks.
The Bank of England (BoE) has already upped rates to 1% since December and analysts are anticipating further hikes as inflation exceeds the 30-year high of 9%.
This presents an appealing point for investors to increase their exposure to the sector, especially in the UK where financials make up a significant part of the market.
However, with so many options available, buyers may be left wondering which UK bank is the best to invest their capital.
Alex Wright, manager of the Fidelity Special Situations fund and Special Values trust, is overweight financials in his portfolios and has increased his holdings in Barclays over recent months.
He said that Barclays is “trading at crisis-like levels despite delivering a solid return on tangible equity”.
Its 12.5% decline in share price over the past year means that valuations are comparatively low to previous estimates.
Wright added: “Profits in the sector are typically hit in downturns, but today banks have strong balance sheets and consumers are in a much healthier position compared to prior recessions. Employment is high, wages are rising and households still have savings from the pandemic.”
Share price of Barclays over the past year
Source: Google Finance
Simon Murphy, manager of VT Tyndall Real Income fund, said that his preferred UK bank is Natwest, mostly because of the large government ownership.
The UK government became a majority shareholder when it spent £45bn in bailing the bank out after the 2008 financial crisis.
Murphy said: “After many years of restructuring under majority government ownership, the bank is now a much clearer investment proposition.”
He anticipates a return on equity above 10% as well as increases to dividend pay-outs and the possibility of special dividends in periods of good performance.
Shares in the bank currently trade on 0.8x price/net asset value (NAV) which “is far too low given the financial performance now being delivered”, according to Murphy.
Although Ben Yearsley, director of Shore Financial Planning, sees the benefits to the government’s stake in Natwest, he said it also comes with some limitations.
The government frequently sells portions of its holdings in the bank, creating an excess of shares. In March, for example, the government lost its majority position when it reduced its share ownership to 48.1%.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said that "the government sorely needs the cash with the costs of borrowing mounting".
Yearsley holds Natwest himself and stressed that he does find it to be a strong company, but personally prefers Lloyds because it is not constrained by the government holding.
He said: “Natwest is the safer option because its been run very safely by the government but you’ve got that overhang on the shares.
“You don’t get that UK focus with Chartered Bank or HSBC and Barclays is always embroiled in problems, so Lloyds and NatWest are the two clear UK bank options now.”
Share price of Natwest and Lloyds over the past year
Source: Google Finance
Although Yearsley prefers Lloyds, its share price is down 8.8% over the past 12 months whilst Natwest is up 18.5%.