Shares in FTSE 100 bank NatWest (LSE: NWG) are 12% down on the year. Much of this, it seems to me, is still attributable to investor fears over another banking crisis.
These fears were dramatically reawakened after Silicon Valley Bank failed and then Credit Suisse collapsed. These events conjured up images for FTSE 100 investors of the collapse of Northern Rock bank in 2007.
These fears still look overdone to me and, in the case of NatWest, look even less grounded.
UK banks are stronger now
One key point for me is that the UK banking system is much stronger than it was in 2007. After the great financial crisis, the Bank of England’s Prudential Regulation Authority regularly began stress-testing for banks’ capital resilience.
Also after 2007, all the major UK banks’ riskier trading activities were further siloed away from their retail activities.
The UK government additionally stepped in when required to support its major banks. These banks were deemed critical to the functioning of the economy. NatWest was one such bank, with the government taking a direct stake in it.
The implication here for me is that the UK government would do the same thing again in such an event.
Strong balance sheets and plans
An indication to me that we are further away from such a crisis came at the beginning of the week. The government sold around £1.26bn of NatWest shares back to the bank via a direct buyback.
This was the sixth block sale of shares since the government intervened in 2008, reducing its stake to around 38%. It seems to me a ringing endorsement of what NatWest has done since then.
This confidence appears well-founded, given the bank’s Q1 2023 results as well. These showed core equity (‘CET1’) capital ratio requirements of 14.4% — higher than in Q4, and above the 10% benchmark. Core equity is composed of highly-rated assets that can be sold off quickly to shore up capital if needed.
Additionally positive was an attributable profit of just under £1.3bn and a return on tangible equity (ROTE) of 19.8%.
Stellar shareholder rewards
In 2022, NatWest shares gave a dividend yield of 11.4%, up from 4.3% the previous year. Dividends vary for a variety of reasons, of course. However, in its 2022 results, chief executive Alison Rose said that the bank plans to deliver a sustainable ROTE of 14% to 16%.
Rose also said that it intends to maintain its payout ratio of 40% in 2023. She added that this will include the ability to deploy any excess capital by making additional share buybacks.
One risk in the stock for me is that a sustained decline in interest rates would reduce its net margins. This, though, could be offset through growth in other areas, such as investment banking.
Another risk is that the global economy takes a very dramatic turn for the worse. This would test even the most robust bank’s balance sheet strength. For me, though, it seems clear that, if required, NatWest would be backed again by the government.
I already have holdings in this sector, but if I did not then I would buy NatWest today. For me, it offers potentially high dividends and growth at a knockdown share price.
