The NatWest Group (LSE: NWG) share price is having a stinker of a time. And it got worse on 27 October when the bank posted its Q3 figures.
The price slumped 18% when the market opened. It clawed back some of that. But at the time of writing, I’m still looking at a 10% drop.
The opening fall, it seems, is the bank’s biggest drop within one day for seven years. It’s the worst since Brexit back in 2016.
It comes on a day when an independent probe into NatWest’s handling of Nigel Farage’s Coutts account found some “serious failings.” It said it was, however, lawful.
The Financial Conduct Authority (FCA) is still in the middle of its own review, and we wait to see what it might do. But these findings may have spooked investors.
The Q3 figures disappointed too as the bank downgraded its outlook.
Pre-tax profit of £1.3bn was less than analysts expected. And the net interest margin dipped in the quarter.
End of interest rates boost?
A net interest margin of 2.94% for the quarter is down from 3.13% in the previous quarter. And it’s even below the 2.99% posted for Q3 2022.
This is with the Bank of England base rate now at its highest. So it looks like the boost from that might have passed its peak.
And without that bonus, it seems investors expect worse to come.
Price fall overdone?
But has the market over-egged the fear, and are bank valuations too low?
NatWest still expects to achieve a return on tangible equity of 14%-16%, both for 2023 and in the medium term. That’s about as good as any FTSE 100 bank, and I’d rate it as just fine.
The company says its credit losses and impairment provisions remain low, with a net charge in Q3 of £229m.
Total impairment provisions stand at £3.5bn, which is a lot of money. But it’s only slightly up on the 31 December figure, even though economic conditions are tougher now.
A CET1 ratio of 13.5% also looks good, so I don’t see any real liquidity fears.
Famed contrarian investor Sir John Templeton once suggested that the key question for investors to ask is: “Where is the outlook the most miserable?“
He called it his “principle of maximum pessimism“, and it really sounds like he could have been talking about NatWest.
He turns convention on its head, as most folk look for the brightest and most optimistic outlook. But that’s when share prices are most highly priced, isn’t it?
I’m not saying things couldn’t get any worse for the NatWest share price.
Whenever I’ve thought that about a bank, it has had the knack of proving me wrong. And when interest rates start to fall, NatWest, along with the rest, could come under more pressure.
But I can’t help thinking Sir John might be rubbing his hands with glee if he could see NatWest stock on a forecast P/E of only 4.7 now.