NatWest (LSE:NWG) shares are often overlooked in my opinion. It’s one of the largest banks in the UK with a market cap of £25bn, but doesn’t get as much attention as Lloyds, Barclays, HSBC, or even the smaller Standard Chartered.
The bank, which is still 42% owned by the British government, has tanked in recent weeks. The stock is down 10% over the month after fears spread from the US banking sector about unrealised bond losses.
So, let’s take a closer look at it.
A good year
Despite falling 10% over the past month, the UK-focused firm is up 12% over the year. Add in a 5% yield, and we’re looking at a total return of 17%. That’s clearly very strong. So, if I’d invested £500 in NatWest a year ago, today I’d have £585.
The growth picture is actually even stronger over three years. We can see that the stock is up an incredible 109% over the period. But of course, three years ago marked the beginning of the first lockdown and some investors saw Covid as an existential threat to our way of life, so that kind of post-pandemic jump isn’t surprising.
A bargain price?
With NatWest shares dipping in March, I’ve been topping up my holding.
In February, the lender posted pre-tax profit of £5.1bn for 2022, up 33.5% from £3.84bn a year earlier and in line with forecasts. It was its largest earnings since the 2008 financial crash when it took a £45bn government bailout.
With the correction and these earnings, NatWest currently trades with a price-to-earnings ratio of just 7.2. That’s obviously not a huge figure. In fact, it’s substantially below the index average, around 12-13 times.
However, there seems to be some debate as to whether the interest rate tailwind will continue, with some analysts suggesting that Net Interest Margins (NIMs) have peaked.
This may be true as we’re clearly close to the peak of interest rate rises. But I think banks will prosper in a slightly lower interest rate environment. When Bank of England rates are around 2% or 3%, Net Interest Income is sizeable, potential borrowers aren’t put off by repayment costs as much as they may be now, and impairment charges are likely to be lower.
I’m buying now with a medium-term interest rate forecast that suggests BoE rates will be in this sweet spot.
Unrealised bond losses?
The final thing to address is unrealised bond losses. The notion that banks were sitting on billions of such losses was the main cause of the recent correction.
But NatWest has very little in common with Silicon Valley Bank, which had to take losses on bond sales when its tech depositors starting withdrawing their capital. In reality, NatWest will hold the majority of these bonds until maturity because it won’t need to sell them.
European banks are much more secure than they used to be. Bad debt levels have fallen over the past decade and these institutions have a lot more liquidity than they used to.
For example, NatWest’s liquidity coverage ratio (LCR) is 145%, representing £52bn headroom above the 100% minimum requirement. This makes it one of the most secure big banks in Europe and the US. Of the big banks, only UBS, Credit Agricole, UniCredit and Santander had LCRs above 150% as of February.
