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Banks have been one of the best performing sectors in the UK this year as high interest rates have given the sector a boost, despite concerns over the recovery of the domestic economy.

NatWest shares delivered their highest return this year to mid-December, up 101 per cent including price increases and dividends, according to investment site Hargreaves Lansdown. Barclays was the fifth best performing stock, with an 81 percent increase.

UK lenders have been buoyed by higher interest rates, which were cut in August after nearly a year at 5.25 percent. This high level allows them to generate an attractive net interest margin – the difference between the amount they pay on loans and earn on deposits.

Analysts argue that banks also benefit from a bad economic environment where some people default on loans – a positive for lenders. However, the economic outlook is mixed. Although the IMF improved its forecast for UK economic growth in October, recent figures pointed to a second consecutive monthly slowdown in October.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said NatWest in particular was “on a roll” this year, pointing to third quarter trading results, which beat expectations. .

“With rates expected to stay a little bit higher for a little longer, that builds on the improved underlying performance as it maintains very strong profit margins,” Streeter said. He added that Barclays also benefited from lower-than-expected bad loans, adding that the bank had a “good grip on costs.”

Standard Chartered was also among the top ten performers this year, increasing 54 percent on a total return basis.

Apart from banks, “recovery” stocks – those that have the potential to rise after falling – also performed well. John Moore, senior investment manager at wealth manager RBC Brewin Dolphin, pointed to aerospace company Rolls-Royce and British airways owner IAG. The shares rose 94 percent and 84 percent respectively on a total return basis.

“Rolls-Royce may be the poster child for ‘recovery’ not only this year but for the decade,” Moore said. “For some, the business looks to be in a very difficult position but the focus and development of the civil aviation and defense areas are turning on the burners that generate money.

“The continued recovery and momentum of aviation also helped IAG which, as a result, was able to increase the yield per passenger and despite prior investment and a strong balance sheet, still found surplus income to pay a dividend for the first time since 2019.”

Richard Hunter, head of markets at Interactive Investor, added that the owner of British Airways “is now firmly on the rise”, as the surprise announcement of a €350mn share buyback program in November is a further reflection of its strong recovery.

“In fact, shares remain down 30 percent over the past five years to pre-pandemic levels, but the scope for further recovery is strong on the evidence given the price performance of the past two years , with shares gaining 127 percent ,” he added.

Corporate takeovers have featured prominently this year, helping boost share prices in Hargreaves Lansdown, which was bought by private equity firms including CVC Partners, and packing firm DS Smith, which was acquired in the US operator International paper. Shares in Hargreaves Lansdown are up 56 per cent this year while DS Smith is up 85 per cent, putting both in the top ten performers.