A valuation gap has appeared in the shares of FTSE 100 bank NatWest (LSE: NWG), in my view.
Investor attention has been focused on the mishandling of former politician Nigel Farage’s account with NatWest-owned private bank Coutts.
Because of that, the bank’s shares failed to react to its excellent H1 results released on 28 July. These add to the many other positives that are not currently reflected in the share price, it seems to me.
As it stands, this ‘Big Four’ UK bank that yielded 11.4% last year is 24% down since February.
Given recent events, a risk in the shares is for further public relations disasters. Another is for a reversal in the Bank of England’s (BoE) current interest rate-raising policy.
Implicit state guarantee
Before this latest publicity disaster, NatWest shares had fallen on fears of a new banking crisis.
These began with rumours from mid-February of the imminent failure of Silicon Valley Bank. Its collapse in March, followed by that of Credit Suisse, pushed banking stocks down around the world.
However, after the Great Financial Crisis (GFC), UK banks were pressured into maintaining core equity (CET1) capital ratio requirements of over 10%. At the time of the SVB and Credit Suisse failures, NatWest’s CET1 was 14.4%.
And the government still has a 38.6% stake in the bank, as an additional surety.
Going from strength to strength
NatWest’s H1 results showed pre-tax profit of £3.6bn, compared to £2.6bn in the same period last year. This was mainly due to operating in a perfect interest rate environment for banks.
UK interest rates are estimated to keep rising until at least the end of H1 2024. So banks’ net interest margin (NIM) – the difference between earnings from loans and payouts for deposits – will continue to grow.
In NatWest’s case, its H1 NIM was 3.2%, compared to 2.58% in H1 2022.
Stellar shareholder rewards
These bumper profits enabled it to announce an interim dividend of 5.5p per share.
It also intends to begin a share buyback programme of up to £500m in H2. This will be in addition to the £1.3bn directed buyback completed in Q2.
One thing that struck me here was that in 2022, the bank’s interim dividend was just 3.5p. But it ended up paying a yield of 11.4%.
If it stuck to that level, £10,000 invested now would make me £1,140 in passive income in a year. Over 10 years, I would have an extra £11,400 to add to my initial £10,000 investment.
This return would not include further gains from any reinvestment of dividends or share price appreciation. On the flipside, there would also be tax liabilities, of course.
I already have holdings in the sector, but even with these, I am seriously considering buying NatWest shares.
One reason is I think they will recoup all their losses since February over time. This will close the valuation gap that I see.
Another reason is for the healthy yields that I think will stay in place for this year.
