2024 was a good year for holders of NatWest (LSE: NWG) shares. The bank’s valuation went from strength to strength last year as it both grew earnings per share and investors were willing to pay a higher price-to-book (P/B) multiple for the stock.
All told, the company’s share price has rocketed 81.5% in the last 12 months and as I write sits at £4.03. A £50,000 investment in NatWest shares one year ago would be worth a whopping £90,750 today.
However, past returns are no guarantee of future performance. I thought I’d dive into some of the pros and cons of investing in the UK banking giant in 2025.
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A year of stellar returns
Global markets entered last year under a shroud of uncertainty. Billions of people were headed to the polls and central bank policy movements were under the microscope.
All in all, higher interest rates helped boost NatWest shares higher with the bank reporting a 5.1% increase in Q3 total underlying income. A shareholder-friendly dividend policy, returning £3.6bn to investors throughout the year in dividends and buybacks, didn’t hurt investors’ opinion of the stock.
Earnings per share (EPS) grew by 12% year on year to 38p, while the bank’s P/B ratio climbed from 0.6 to 1 as its market cap reached £33bn.
Upside in 2025
The bank navigated a potentially tricky year quite well and investors will be hoping for more of the same in 2025.
A higher-for-longer interest rate environment is one thing that could help propel NatWest shares higher. If the Bank of England holds firm then that could be a positive for net interest income.
The other big factor is economic growth. If the UK economy can outperform expectations, there could be plentiful lending opportunities for the bank to capitalise on.
This is where I think NatWest’s acquisition strategy could come into its own. The bank is set to finalise the acquisition of £2.5bn in gross consumer assets from Sainsbury’s in early 2025. Provided the economy holds steady, I think this could help propel the company’s income higher in 2025.
Potential risks
Uncertainty lingers over the economy right now. Experts are divided on prospects for UK economic growth, likely monetary policy movements and the ever-present threat of further inflation.
Many are tipping modest growth this year despite potentially stubborn inflationary pressures. There’s the risk that protectionist trade policies under the new Trump administration could keep inflation higher than expected this year.
Base interest rates are forecast to ease slightly throughout the year, so any surprise rate hikes to combat inflation could spook investors and send shares tumbling lower.
Will I be buying?
While I’m always hunting for new bargains, I won’t be buying NatWest right now. The bank has had a great year, but I want to see how the macroeconomic picture starts to shape up in 2025.
In the meantime, I’ll be hunting for more defensive shares in sectors like pharmaceuticals and consumer staples.
