One of the strongest areas of the FTSE 100 during 2024 has been the banking sector. After several years of underperformance during the pandemic and the interest rate hiking cycle, these stocks are topping the index.

5 big winners

There are five banks listed on the FTSE 100. In order of market value, these are HSBC, Barclays, NatWest Group, Lloyds (LSE:LLOY), and Standard Chartered. And they’ve all performed well this year as the below table shows.

As there are five stocks, I’ve split the £10,000 five ways, assuming a £2,000 investment in each of the banks.

Today, the total value of the shares owned in these banks would be £14,690. That’s truly phenomenal growth, reflecting an improving macroeconomic environment and some supportive trends relating to slow monetary easing.

However, it’s important to note that these stocks also pay strong and sizeable dividends. My calculations suggest an average forward dividend yield around 5% — possibly a little higher — for an investment made at the start of 2024.

In turn, these dividends would take the total returns to around £15,190. That’s a 51.9% return in less than 12 months.

Will these banks continue to win?

As we look towards 2025, the FTSE 100 banking sector appears poised for continued outperformance, driven by the anticipated interest rate cuts and their unique positioning to capitalise on this economic shift.

The Bank of England’s expected to continue its rate-cutting cycle, with forecasts suggesting a reduction from the current 5% to 4.75% in the near term, potentially followed by two to three more cuts throughout 2025. Historically, such cycles have been favourable for UK stocks, with the FTSE 100 showing positive returns in four out of the last five cycles, one year after the first rate cut.

Banks, in particular, stand to benefit significantly from this environment. They employ structural hedges by investing in long-term bonds when rates are high, securing strong yields for the long run and extending the positive impacts of higher rates — without the negatives. As rates decrease, banks can reduce interest payments on customer deposits, effectively widening their profit margins.

A potential standout choice

Lloyds could be a standout choice despite underperforming its peers. With its substantial mortgage portfolio — the UK’s largest — Lloyds is well-positioned to benefit from reduced default risks in a lower-interest-rate environment. Moreover, lower rates typically stimulate borrowing activity, potentially leading to increased loan volumes and associated fee income for banks like Lloyds.

The lender underperformed this year due to concerns about fines related to missold motor finance. The exact outcome is not yet known, but the money Lloyds put aside for this eventuality may not be enough.

However, it’s crucial to note that while the banking sector averaged impressive 33% returns during past rate-cutting cycles, past performance doesn’t guarantee future results.

The economic landscape’s complex, and factors such as the recent Budget’s impact on inflation expectations could influence the pace of rate cuts. Personally, I maintain a position in Lloyds but won’t add to it due to concentration risk.