NatWest Group (LSE:NWG) has been the FTSE 100‘s most spectacular performer of late, its shares soaring 54% during the past three months. Yet on paper the banking giant still offers stunning all-round value, in my opinion.
At 322.6p per share, the shares trade on a forward price-to-earnings (P/E) ratio of 7.9 times. This is comfortably below the Footsie average of 10.5 times.
On top of this, investors can grab a healthy 5.2% dividend yield with its shares right now. By comparison, the broader index average sits back at 3.5%.
The high-street bank could be in line for further significant gains as market confidence improves. But there are also substantial risks that could see it crash to earth again. What should I do?
Why is NatWest soaring?
As with many other FTSE 100 shares, NatWest’s share price has taken off as investor appetite for value has intensified.
Talk that UK shares are undervalued has been circulating for a long time. Many City analysts believe the market is now wising up to this idea and piling into the London stock market en masse.
Demand for NatWest shares has been especially strong thanks to forecast-topping full-year and first-quarter results this year. Latest financials in late April showed total income of £3.5bn for the March quarter, above the predicted £3.4bn.
Pre-tax profit of £1.3bn was in line with expectations. But bad loans of £93m was around half the level brokers were projecting.
On top of this, NatWest’s net interest margin (NIM) came in at 2.05% for quarter one, beating a predicted 1.98%. This key metric gauges the difference between the loan interest that banks generate and the interest they pay depositors.
Elephant in the room
However, I’m aware that these specific numbers are just tiny nuggets of good news. The bigger story is that profits for all of Britain’s banks are falling sharply: NatWest’s own operating pre-tax profit plummeted 27% year on year in quarter one.
Earnings are slumping as the earlier boost provided by Bank of England rate rises subsides. Higher rates are critical for banks’ NIMs, and with cuts being potentially lined up for the summer, margins are on course to keep declining.
At the same time, the outlook for cyclical high-street lenders remains largely bleak as the UK economy struggles for traction. Latest unemployment figures today (14 May) showed jobless numbers rise to 4.3% in quarter one.
Major forecasters are expecting the trading environment to stay tough, a bad omen for cyclical shares like this. Both the International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD) have cut UK GDP forecasts in recent weeks, the latter now predicting paltry growth of just 0.4% in 2024.
The bank is already struggling to grow loans and manage margin declines as competition intensifies. With the UK economy facing substantial structural problems, profits growth may remain weak despite its mighty brand power.
Here’s what I’d do now
I believe that NatWest’s share price gains fail to reflect its sobering outlook for 2024 and beyond. And the risks of it reversing action are high, and especially as the government (which holds a near-28% stake in the bank) continues to sell shares.
For these reasons, I’d rather look for other UK value stocks to buy right now.
