The NatWest (LSE:NWG) share price stood out in 2024 as it shot up by a whopping 82%. This came as large stock buybacks, lower impairments, and rebounding margins led to healthy multiple expansion. But given the monumental rise, the question begs as to whether it can match returns of such calibre in 2025.
A buyback machine
It may come as a surprise that the NatWest share price rose by so much in 2024. After all, both its revenue and profits actually declined on the back of lower interest rates.
So what caused the shares to shoot up so monumentally then? The answer lies in the massive stock buybacks which occurred between the bank and the UK Treasury. This resulted in 173.3m of on-market share buybacks and 392.4m directed buybacks from the Treasury, as the UK government continues to reduce its stake in the bank following the 2008 financial crisis bailout.
The Treasury’s intention is to get its stake down to 0% by 2026. As such, further buybacks are on the cards. It’s worth noting that the government’s current stake is now below 10%, so this should serve as a supportive trend for further earnings per share (EPS) growth. Consensus estimates see the share count reducing to 7.5bn by the end of 2026, from 8.3bn today.
Confidence is in the doldrums
That said, fundamental earnings growth will still have to come from loan and income growth. The positive is that deposit outflows have stabilised. This means that NatWest can now issue more loans and earn interest/income from those loans. However, this is easier said than done. Further growth for its business will be contingent on the state of the UK economy.
It’s crucial to highlight that unlike its closest peer in Lloyds, NatWest has a bigger exposure to business loans. 38% of its loans come from the commercial and institution side. This, therefore, exposes the FTSE 100 stalwart to a greater level of risk given the latest economic developments.
UK business sentiment’s in the doldrums after the latest Budget saw taxes increase for businesses, with the cost of borrowing now also at multi-year highs. Therefore, this could push the UK into a recession which could stifle loan growth from businesses and, worse still, impact mortgages – NatWest’s main income stream.
A valuation conundrum
But before jumping to conclusions, I’m determined to see whether such a gloomy scenario has been priced in. Taking a look at the latest consensus estimates, EPS is projected to rise by 6.5% in FY25 to 52.7p.
Moving forward to FY26, analysts then estimate a bigger jump of 15.2% to 60.7p as the impact of structural hedge income and cost savings begin to materialise. This will also be helped by lower interest rates by then, which will aid loan growth and income for the firm. This is then forecast to lift EPS to 63.5p in FY27.
This implies a price-to-earnings-growth (PEG) ratio of 1.1. In the context of its banking peers’ median of 1.3, this implies further share price growth for NatWest. On that basis, I remain bullish on the stock, although I doubt a similar performance akin to its 2024 return can be beaten this year. It’s certainly a stock I’m going to keep a close eye on.
