At a P/E ratio of 4, is the NatWest share price too cheap to ignore?

Down 30%, the NatWest share price looks like a bargain. But are higher interest rates, rising loan defaults, and narrower margins a risky combination?

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Image source: NatWest Group plc

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Since the start of the year, the NatWest Group (LSE:NWG) share price has fallen by just under 30%. As a result, the stock trades at a price-to-earnings (P/E) ratio of just four and the dividend yield is now over 8%.

That’s a big discount to the FTSE 100 average, indicating that investors are currently pessimistic about the company’s prospects. But is this an opportunity to buy some shares at a discount, or a value trap?

Issues

At the moment, NatWest is facing two major issues. The first is a general challenge for UK banks – rising interest rates have gone from being a tailwind to a threat.

With interest rates on savings rising faster than interest rates on mortgages, margins are getting compressed. Furthermore, loan losses are rising as debts go bad. 

These are both general issues being felt across the banking sector, But NatWest has problems of its own, which explain why the stock has fallen more than its rivals since the start of the year.

Earlier this year, Coutts (a NatWest subsidiary) decided to close Nigel Farage’s accounts. That decision may or may not have been justified, but CEO at the time Alison Rose discussing the case with a BBC reporter was not.

The firm has apologised and launched an investigation. But whatever happens next, the case indicates a lack of internal controls that might justifiably make shareholders concerned.

Shareholder returns

At today’s prices, the NatWest share price implies the market doesn’t expect the company to do much more than stay afloat. And I think there’s a decent chance this could happen.

For the time being, the Bank of England looks set to keep interest rates where they are. This should help alleviate the pressure on margins the business is battling with at the moment.

It’s also worth noting that the firm is returning a lot of cash to shareholders. On top of a dividend with a yield of just over 8%, the bank has also reduced its share count by 10% via buybacks.

A lower share price makes share repurchases more effective. And as well as increasing the value of its remaining shares, buybacks also help NatWest reduce the UK government’s stake in the company.

A stock to buy?

To me, NatWest looks like an especially risky stock in a risky sector. But I think there’s also a real possibility of correspondingly high rewards. 

As Warren Buffett knows, the best investment opportunities often come when stocks are under pressure. When American Express was in the middle of a scandal, the Berkshire Hathaway CEO seized an opportunity.

The Oracle of Omaha’s courage was rewarded handsomely. Today, the dividends Berkshire receives amount to a 23% return on the firm’s initial investment.

I’m not saying an investment in NatWest shares is going to yield similar results. But I think there’s a real chance that being greedy when others are fearful might pay off here – and I’m tempted for my own portfolio. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

American Express is an advertising partner of The Ascent, a Motley Fool company. Stephen Wright has positions in Berkshire Hathaway. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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