On paper, it seems as if NatWest Group (LSE: NWG) could be too cheap for me to miss. The FTSE 100 bank trades on a forward P/E ratio of 11.2 times. It also carries a 4.1% dividend yield, much better than the 3.5% Footsie average.
Fans of NatWest argue that things are looking up for the bank as the economic recovery continues and central banks raise rates. Indeed, the share price was up 2.7% Wednesday as traders expect the Federal Reserve to get tough on raising rates after it meets later today. Such talk leads to speculation that the Bank of England will follow a similar path.
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Higher rates will be good for NatWest as it’ll increase the profits it can make on lending. This FTSE 100 share has risen 66% over the past 12 months as investors have responded to Britain’s improving economy and the prospect of multiple rate hikes by the Bank of England.
However, it’s my belief that buyers may have been getting a bit carried away. To my mind, the risks of buying the shares remain significant.
Covid-19 and Brexit threats
The ongoing threat of Covid-19 to bank earnings is something I think NatWest’s rampant price rise doesn’t reflect. Sure, vaccination rates in the UK are higher than the global average. But the steady emergence of coronavirus variants remains a massive danger to economically-sensitive stocks like this. BA.2 is the latest rapidly-spreading variant to spook the medical community.
More virus mutations could be coming down the pipe too to threaten the global economic rebound. This has the potential to not only damage expected revenues growth at banks like NatWest and push up bad loans. The economic consequences of a worsening Covid-19 crisis could also prompt central banks to ditch plans for strong and sustained rate rising.
It wouldn’t be a surprise to me to see the share price reverse sharply then. But its troubles stretch beyond the possibility of coronavirus-related turbulence in the short to medium term because of Brexit.
The Centre for Economics and Business Research says that Covid-19 and Brexit have cost the UK economy similar amounts running into hundreds of billions of pounds. However, the body warned that Brexit-related bills are now rising at a faster pace.
Why I’d ignore NatWest and buy other stocks
I also worry for it because the competitive pressures it faces are increasing rapidly as well. Challenger banks such as Revolut and Starling Bank have been steadily eroding the customer bases of traditional banks like these with their digital-led operations over the past decade. ‘
Buy-now-pay-later specialist Klarna’s decision to roll out a payments card that can be used in physical stores adds another significant danger to NatWest and its peers.
So while the share price is cheap, I think its low cost reflects the broad spectrum of dangers it faces. I’d rather buy other UK shares today. There are plenty of other cheap British stocks for me to choose from, after all.