At the banking of the Bank of England, the committee decided to raise interest rates by 0.15% to 0.25%. It was the first move that signaled the intention to raise the rates to start the fight against growing inflation. Over the next few years, the basic rate increased higher to 5.25%. FTSE Bank shares benefited from this, and each investment made at the end of 2021 was now very attractive.

Keeping a fee

I assume that instead of putting all eggs into one basket, the investor could divide 5000 pounds between five different banks. This would reduce the overall risk in case of worse results. For example, they could choose BarclaysIN HSBCIN LloydsIN NestwestAND Metro Bank (LSE: MTRO).

If at the beginning of December 2021 1000 pounds were introduced in each bank, a percentage refund from all five would give a total current value. Interestingly, the best contractor was Natwest Group, winning 123% during this period. The worst contractor was Metro Bank, by 15%. In general, the return from the banking portfolio was 74.7%. So 5000 GBP would now be worth 8735 GBP.

It’s impressive, especially when I think it is FTSE 100 In general, it increased by 21% in the same period.

Benefit of high interest rates

To some extent, the belief that interest rates would raise rapidly, would mean that buying banking inventory was an smart move. All banks in the portfolio earn primarily thanks to the net interest margin. This applies to the difference between the rate calculated on the loan and the rate paid to the deposits. When the basic rate is close to zero, there is not much margin (unless you have negative deposit rates!). When the basic rate increases, also net interest income.

Metro Bank took advantage of this. According to year -round results in 2022, the net interest margin increased from 1.23% in 2021 to 1.91% in 2022. Net interest income increased to 475.6 million GBP in 2022 (compared to 353.2 million GBP in 2021). Metro Bank had a sticky deposit base because of its weighty branch model, which allows him to utilize more than FinTech. In 2022, total deposits amounted to 16 billion pounds, which helps support loan growth and interest profits.

The price of the shares increased by 221% last year, although this is slightly misleading, because the price of the shares dropped at the end of 2023 and at the beginning of 2024, due to the fact that it must implement a refinancing package of 925 million GBP. This was related to problems in meeting the regulatory capital requirements and there was no good look of the bank.

Looking to the future

Although the banks were doing very well, I am not very hopeful. Interest rates are falling and it should continue to do it. Although banks can still remain profitable thanks to other streams of income, I do not see the same type of profits so likely for the next few years. That is why I will look for other sectors (such as AI) as areas of growth for the future.