I sold my shares in NatWest (LSE: NWG) last year. If I had held on longer, I could have made more money than I did: over the past year, the shares have inched up 6%. Add to that a 5% dividend yield and the one-year return is in double digits.
I was far from the only seller, though. The government has continued to sell down its large stake in the bank. Three directors also made share sales in the second half of May that grabbed my attention.
Director selling
During May, directors both bought and sold shares in the bank.
But it was some of the sales that I found most interesting. The CEO of NatWest Markets unloaded 100,000 shares. Another director-level employee sold over 80,000 shares. The chief financial officer sold over 600,000 shares.
What strikes me is that those are sizeable sales. With the shares trading at around £2.60 apiece, selling 600,000 shares would raise well north of a million pounds.
Unknown motives
But while we know directors have been selling, we do not know why.
There can be all sorts of reasons directors sell shares, that do not necessarily have anything to do with how they expect the business to perform. Examples include financial planning, portfolio diversification, and the need to raise cash to settle an expense such as a tax bill. So, just because multiple directors sell shares in a short period of time, that is not necessarily a bad sign about what might happen next.
Still, if the chief financial officer of a bank sells 600,000 shares in it, it does make me wonder how confident she is in the firm’s medium-term prospects. After the sale, she still held over half a million NatWest shares. But the move does not inspire confidence, in my view.
Banking outlook
At first glance, NatWest looks to be performing robustly. Profits in the first quarter surged compared to the prior-year period.
But I have doubts about the short to medium-term outlook for British banks.
The US has experienced a banking crisis over the past half year or so, including some of the largest bank failures in its history. Although regulators have been keen to send out a message of business more or less as usual, such failures concern me.
They underline the possible fragility of some banks. In a severe economic downturn, I think there could be worse yet to come.
On this side of the pond, some of the same economic headwinds exist. The UK property market could fall. That would likely hurt revenues and profits at banks if bad debts increase. That in turn could mean share prices fall.
Staying out
Those risks concern me. The scale of director selling we have seen recently also raises a red flag for me about adding NatWest shares back into my portfolio at this stage.
Based on common metrics like its price-to-earnings ratio of under seven, the bank’s valuation looks cheap. I think its strong brands and large customer base could also help it continue to make large profits.
However, the uncertain outlook for British banks puts me off investing in NatWest for the foreseeable future.
