Following the release of its full-year 2023 report, the NatWest Group (LSE:NWG) share price is up almost 5% today (16 February). It reported its highest profit in 26 years, causing plenty of cheer for investors. Yet the stock is still down 23% over the past year.
I think that there’s plenty of room for the stock to rally further. Here’s why.
Momentum from full-year results
Pretty much everywhere I looked, financial metrics were better in 2023 than 2022. To begin with, the key drivers such as revenue, profit before tax, and the dividend per share were all up from last year.
If we breakdown what helps to push a stock higher, a key factor is larger profits based on higher revenue. So the fact that the business grew profit before tax from £5.1bn to £6.2bn should naturally feed through to a higher share price.
The jump today certainly helped, but with a low price-to-earnings ratio of 5.87, I think there’s more room to run higher. When investors factor in the outlook for future earnings as well, I struggle to see how the stock won’t be higher than current levels by the end of the year.
The benefits of digital
The push towards becoming a more efficient digital bank is also working. For example, 67% of retail banking clients are now exclusively using online channels. This rose from 63% the year before.
This is really important because online self-service helps to lower costs for the group. Some of this will be through job cuts, but more will be through eliminating unneeded manual processes.
The online benefits are also being fed through to commercial and institutional customers. In 2023, 86% of that user base actively used digital channels to interact with NatWest. This is very high and impresses me.
Ultimately, this push should help the share price. A more efficient bank will record lower costs, as well as being a tool to win over new customers. The net result of this should be higher profits.
A diversified client base
A final reason why I think the stock could do well is the spread of clients that it serves. The group isn’t just NatWest, but it also includes the private bank Coutts and RBS.
This means that it serves everyone from the man on the street, to multimillionaires, to businesses, to financial institutions.
Given the uncertainty about the UK economy this year, I think investors will jump on the fact that NatWest serves such a diverse set of clients. In contrast to a retail-heavy bank like Lloyds Banking Group, NatWest should be better insulated against problems for retail consumers.
So when new investors look at the best place in the banking sector to get exposure, I think NatWest should come out top trumps.
Watch for interest rates
One risk with the bank is that it could be negatively impacted by falling interest rates. This would likely cause the interest income to fall. However, it’s still very up in the air as to if and when the base rate will drop.
Overall, I think there are plenty of reasons to find value in the share price right now. I’m thinking about adding the bank to my portfolio.
