This FTSE 100 dividend-paying share trades on a rock-bottom earnings multiple for 2023. Meanwhile, its yield for this year sails above the 3.7% index average. So should I buy it for my Stocks and Shares ISA today?
Interest rate boost
Retail banks like NatWest Group (LSE:NWG) can suffer badly during tough economic times. Loan growth can stall and impairment charges can soar as businesses and individuals struggle to make ends meet. This particular bank set aside another £70m in the first quarter to cover the cost of bad loans.
Yet City analysts expect earnings here to soar 29% in 2023. They also see profits increasing as interest rates continue rising. Investec, Deutsche Bank and Goldman Sachs all expect rates to peak at 5.25% this year, up from current levels of 4.5%.
It’s quite possible that rates will rise beyond this benchmark too, given how stubbornly high UK inflation remains. Higher rates boost NatWest’s profits by widening the margin between the borrowing rates they charge on loans and the interest they pay to savers.
No home comforts
But the benefit brought by further Bank of England rate hikes threatens to be undone by soaring credit impairments. As I mentioned earlier, the number of bad loans on its books has kept rising as the UK economy has struggled. And as rates push Britain towards recession more heavy charges could be coming.
I’m particularly concerned by a potential meltdown in the housing market as interest rates rise and how this could affect the FTSE bank. It’s the country’s second-biggest home loan provider with a market share of around 12%.
According to UK Finance, 750-homeowner mortgaged properties were repossessed between January and March. This was up a whopping 50% from the previous quarter. There were also 27,700 homeowner mortgages in arrears of 2.5% to 5% (up 5% quarter on quarter).
Dividend forecasts
In better news, I’m not concerned that the tough economic backdrop could cause NatWest’s dividends in 2023 to miss forecasts. The predicted payout is covered 2.6 times by expected earnings.
The bank also has a strong balance sheet that could help it pay big dividends if earnings disappoint. Its CET1 capital ratio stood at 14.4% as of March.
But the 7% yield that NatWest shares currently carry isn’t enough to tempt me to invest. I fear the bank’s share price (which has dropped 4% in the year to date) could keep falling if Britain’s economy keeps struggling and competition in the banking sector heats up.
Here’s what I’m doing now
Fans of the UK bank might argue that these risks are baked into the FTSE 100 bank’s rock-bottom share price. Today, it trades on a forward price-to-earnings (P/E) ratio of 5.5 times.
This isn’t a view I share, however. It’s my opinion that current bubbly earnings forecasts could be rapidly downgraded as the year progresses. And this could pull NatWest’s share price much, much lower.
So I plan to buy other high-yield dividend stocks for my portfolio today.
