It appears that the FTSE 100 index is headed back to its pre-pandemic highs of early 2020. A rise in the index levels also shows that its constituents’ share prices are rising, of course. But not all stocks that form the index have risen equally. Some of them are still lagging. I reckon 2022 could be their year.
Recovery to encourage FTSE 100 banks
One segment that looks promising to me right now is banking. Banks are cyclical stocks. This means that they tend to be more sensitive to ups and downs in the economy than other stocks like utilities or pharmaceutical companies. So, as the growth cycle turns upwards, fortune could smile upon them. FTSE 100 banks have already seen improvement in both their performance and their share prices this year. And in the next year, even better performance is possible.
Rising interest rates
Interest rates are expected to start rising sometime soon. Inflation is at an uncomfortably high 4% level and is expected to stay there all through next year. This is likely to prompt the Bank of England to raise interest rates soon enough. This in turn could result in an increase in interest rates by commercial banks as well. Greater flexibility to raise interest rates could be good for banks’ margins. And that could mean improved performance.
Freedom to set dividends
Banks could also benefit from the flexibility to set their own dividends. They were regulated against doing this for a while. As the pandemic began, the authorities first asked them to cease paying dividends and later to pay them only to a limited degree. Now that these restrictions have been removed, they are free to pay out as much in dividend income to investors as they like. Right now, FTSE 100 banks’ dividend yields are below or just at the average yield for the index as a whole. But I am looking out for future developments on this. This is because I think dividend payouts could impact their stock market fortunes significantly.
2 FTSE 100 banks I’d buy
Even though they have recovered a fair bit, banks like Barclays and Natwest are still not back to their pre-pandemic levels. They are almost there, but not quite. Also, their price-to-earnings (P/E) ratios are quite low. Barclays’ is a super-low 6.4 times and Natwest’s is around 10.5 times. Alternative indicators like price-to-book are sometimes preferred when assessing whether banks are fairly valued or not. But to get a broad comparison across FTSE 100 stocks, P/E is still a good one to consider, in my view. With low P/Es and recent improvements in performance, I reckon that their share prices could rise more.
Of course runaway inflation, a slow recovery, and a return of the pandemic could derail their growth. But all things considered, their prospects look good to me for now. I would buy them now, before their share prices run up further.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.