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As the NatWest share price shrugs off the threat of a big fine, should I buy?

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NatWest Group (LSE: NWG) pleaded guilty Thursday to charges related to money laundering. It concerns the alleged laundering, by one customer, of more than £350m. The bank faces the possibility of a large fine, which I thought might have had an effect on the Natwest share price. But it’s down less than 1% on the day as I write, so it seems minimal.

The FTSE 100, plus the other big name banks, are up slightly on the day. So maybe there is some negative reaction towards NatWest. But it’s minor negativity at worst.

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The money-laundering case centres on Bradford jeweller Fowler Oldfield Ltd, which closed down after a police raid in 2016. The firm had predicted annual turnover of £15m as a NatWest customer. But it deposited £365m with the bank over five years, with £264m of that in cash. And NatWest, contrary to the requirements of money laundering law, did not appear to notice anything unusual.

The case is the first under 2007’s new money laundering legislation, and lawyers are suggesting the resulting fine could be very large. NatWest, formerly Royal Bank of Scotland, is still 55% state-owned. So, perhaps ironically, the government looks set to raise a substantial part of the fine effectively from itself.

Impact for investors

For investors, the big question now seems to be what impact any fine might have on NatWest’s profitability, and on the prospects for the Natwest share price. That, of course, will depend on how big the fine actually is. But in comparison to the bank’s turnover and profits, I can’t see it making more than a relatively small dent.

For the first half of the year, NatWest recorded an operating profit of £2,505m. So I think any fine would need to be huge to make any serious impact. We’ll have some idea soon enough, as the bank has saidA provision will be made in NatWest’s Q3 2021 financial accounts in anticipation of a potential fine being imposed“.

The sentencing hearing should be in four to eight weeks’ time. And Q3 accounts should be here on 29 October. In the meantime, how does the bank look as an investment candidate?

Natwest share price valuation

The shares have just about doubled over the past 12 months, leading the big high street banks. And looking back over two years, it’s up 3.5%. Coupled with strong first-half progress, it looks like NetWest’s longer-term recovery is getting back on its pre-pandemic trajectory.

If first-half earnings per share doubles for the full year, it would beat 2019 earnings. And on the current NatWest share price, we’d be looking at a price-to-earnings multiples of only a bit over seven. There was an interim dividend of 3p per share, which annualised, would yield 2.7%. The bank is also in the process of returning surplus cash. In July, NatWest said that, “our total distributions for 2021 will be a minimum of £2.9bn“.

I reckon that looks like an attraction valuation all round, and I’d buy. But what’s the downside? Well, I have been saying the same about the UK’s troubled banks, especially Lloyds, for years. And they still haven’t bounced back to strong valuations. Maybe now just isn’t the time. Not when we still face serious economic uncertainty. Still, for the long term, I’m bullish about banks.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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