Retail banking is one of the few sectors that can benefit when interest rates rise. So, with the Bank of England having raised its base rate on two occasions already this year, how have bank shares been performing?
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Why can bank shares benefit from interest rate rises?
Whenever the Bank of England raises its base rate, the stock market typically stumbles. The bank’s most recent decision to increase rates was made on Thursday last week.
Rate rises are usually bad news for share prices as, by definition, higher interest rates increases the cost of borrowing. This can have a negative impact on businesses with debt.
Similarly, higher interest rates can add to economic certainly, which can make organisations reluctant to make long-term decisions. Again, this can harm share prices.
Higher interest rates also harm consumers. That’s because when rates rise, it can encourage cautious spending behaviour. This is another factor that can harm share prices, especially for ‘business to consumer’ organisations.
For the financial sector, including banks, higher interest rates may actually boost share prices. That’s because higher rates can make financial products more profitable.
For example, a higher base rate allows banks to hike mortgage rates. And while banks do come under pressure to raise savings rates at the same time, they rarely do. As a result, higher interest rates give banks a golden opportunity to boost profits.
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How are bank shares performing this year?
To understand how individual banks are performing this year, let’s take a look at how the values of six FTSE 100-listed banks have changed since the markets opened on 4 January this year.
| Bank | Share price on 4 Jan (GBX) | Share price on 21 Mar (GBX) | % change |
| Barclays plc | 196.66 | 169.70 | -13.7% |
| HSBC Holdings plc | 471.50 | 500.80 | 6.21% |
| Lloyds Banking Group plc | 49.91 | 48.75 | -2.32% |
| Royal Bank of Scotland Group plc | 234.90 | 214.90 | -8.51% |
| Standard Chartered plc | 462.80 | 508.60 | 9.9% |
Mixed fortunes
As the table above shows, despite two base rate rises already this year, 2022 has so far delivered mixed fortunes for big-name banks.
Holders of Standard Chartered shares will no doubt be the happiest. Its share price is almost 10% higher than it was at the start of the year. Despite being headquartered in London, the banking group doesn’t have any branches in the UK. Instead, it mainly focuses on Asian markets.
Another strong performer this year has been HSBC holdings, with its shares up over 6%. The banking giant had a steady, if not marvellous, 2021, and it seems as though it has continued this performance during the first three months of 2022.
In stark contrast, Barclays has struggled in 2022 so far. Its shares are almost 14% lower than they were in January. Barclays shareholders will no doubt be hoping the bank will bounce back to repeat its performance of 2021. Last year, Barclays was a hot pick among investors due to its shares soaring by 28%.
Another big faller so far in 2022 is Royal Bank of Scotland. Like Barclays, RBS shares skyrocketed in 2021, climbing by almost 35%. However, it remains to be seen whether the bank can shake off its sluggish start to the current year.
Are bank shares a good buy?
As we’ve seen, despite interest rate rises often being welcomed by the banking sector, there’s no guarantee that hikes will correlate with higher share prices of companies within the sphere.
So, if you are interested in adding banking stocks to your portfolio, it’s best to do this as part of a diverse investing strategy.
It’s also a good idea not to hold any expectations of share prices rising in future simply as a result of decisions made by the Bank of England. Remember, markets already expect further base rate rises this year, so this will already be priced into current share values.
Are you looking to invest? If you’re looking to buy individual stocks, then you’ll first need to find an investing platform. To compare options, take a look at The Motley Fool’s top-rated share dealing accounts.
