There have been some big FTSE 100 index winners over the last 12 months. The UK large-cap index has gained 13.7%, rising to 8,673 points as I write on 31 January.
One of the strongest sectors over that period has been financial services. A high interest rate environment has helped increase net interest income for the banks and boosted share prices.
NatWest (LSE: NWG) is one such stock. Its share price has rocketed 92.9% higher over the past year to £4.34 per share on 31 January.
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I wanted to explore what’s driving the company’s market cap higher and evaluate where it sits among its UK banking peers.
Bumper year for banking stocks
While the Bank of England has begun cutting rates, all indications are that the US Federal Reserve and other central banks will be slower than expected in cutting rates. High interest rates have increased bank revenues, while loan defaults have remained subdued, boosting net interest income.
In the third quarter of 2024, NatWest outperformed analyst estimates by reporting a 25.7% increase in pre-tax operating profit to £1.7bn.
Bank revenues increased to £3.8bn as management upgraded its annual return on tangible equity (ROTE) forecast to over 14%. Additionally, deposits grew by £2.2bn, and lending increased by £8.4bn during the quarter, which all helped boost the company’s share price higher.
It was a similar story for many of the other UK banks. Barclays (LSE: BARC) has gained 100% to £2.98 per share, and HSBC (LSE: HSBA) gained 37% to £8.48 per share, to 31 January.
Valuation
I thought I’d take a look at some common valuation metrics. The first one is the price-to-book (P/B) ratio, which measures a company’s market cap against the net book value of its assets held on the balance sheet.
NatWest’s P/B ratio of 0.93 is fairly comparable to HSBC’s ratio of 1, while Barclays appears the most undervalued. Bear in mind, though, Barclays is undergoing significant change at the moment with £10bn capital forecast to be returned to shareholders and focusing on a smaller investment banking division.
NatWest’s dividend yield of 4% sits neatly in the middle of Barclays (2.8%) and HSBC (5.7%). I do think the HSBC dividend is one to be a touch wary of given the transformation underway at the bank.
NatWest currently has a 9.1 price-to-earnings (P/E) ratio, which is marginally higher than HSBC’s 8.8 times multiple. Barclays, after its strong recent gains, is trading at a P/E ratio of 11.9 times and looks a touch expensive.
Verdict
The relative valuation metrics above present something of a mixed bag. All in all, I feel as though NatWest is undergoing perhaps the least change among the three banks discussed.
That could work in its favour by doing more of the same and continuing to grow its book, while its peers look to fundamentally transform their businesses. I’m not looking to add these banking stocks to my portfolio right now, but Barclays is the one that I think is most worth considering among the UK bank stocks.
While the bank has a long transformation journey ahead, I think it is showing promising signs of it working, and the potential growth trajectory may justify a higher P/E ratio.
