As I look at 2022, I think that banking could be a hot sector to invest in. Several central banks have either started to raise interest rates or are going to start doing so shortly. Leading research analysts are calling for as many as four rate hikes from the US this year, and even three from the UK! Given the benefit of higher interest rates for the operating income of banks, I’m on the hunt for good FTSE 100 banking stocks.
A bank focused on growing regions
Last week, one of the best performing FTSE 100 stocks across the board was Standard Chartered (LSE:STAN). The share price jumped almost 10%. Over a one-year period, the share price is up 7.6%.
Standard Chartered is a global bank, employing over 85,000 people in 59 markets. It operates in different segments, including corporate, retail and private banking.
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One of the strengths that I see in particular with this FTSE 100 stock is its deep ties with Asia. It’s dual-listed in both the UK and Hong Kong. The presence it has in areas such as Hong Kong and Singapore is key, as well as having an office in mainland China. In coming years, this part of the world is expected to develop fast, helping to create wealth in the process. As a bank with a focus on this region, Standard Chartered should be able to benefit from new accounts and attracting more deposits.
Benefiting from higher interest rates
Aside from the specific benefits of Standard Chartered, it should be aided by higher interest rates around the world. I think this is one reason why other FTSE 100 banking stocks also rallied last week.
Higher interest rates allow banks to make a larger net interest margin. This margin is the difference between the rate charged on loans versus the rate it pays out on deposits. The higher the base interest rate, the higher the margin that the bank can make. So one reason why the share price has been rallying is due to expectations that more rate hikes are coming in 2022.
If this is the case, then over the course of this year and beyond, Standard Chartered should record more operating income. This then helps to filter down to the bottom line. If the bank can keep control of costs, then profitability should increase.
A FTSE 100 banking stock for the future
In terms of risks, the business does need to keep a firm grip on internal controls and reporting. It was recently fined over £46m by the UK regulators. This was for misstating liquidity positions over a period from 2018 to 2019. Although these issues are in the past, a company the size of Standard Chartered does have the reputational risk of not accurately reporting the finances when due.
I’m happy to accept that risk, given the opportunity for the firm to perform well in the future. This comes both from the focus on Asia and higher potential interest rates. I’m considering buying the stock at the moment.
