The NatWest (LSE:NWG) share price has climbed 85% over the last 12 months. And in valuation terms, the stock now trades at a price-to-book (P/B) ratio of 1.05 compared to 0.55 a year ago.
That makes it look like the time to consider buying has passed, especially given the inherent risks of investing in bank shares. But I think there could well be more to come.
Ownership
The first – and most obvious – benefit is NatWest is about to return to being fully private in terms of its ownership. The UK government’s stake in the bank is now below 7%.
The most obvious benefit is the company should be able to make decisions with a clearer focus. In particular, it won’t have to consider how its plans align with government priorities.
An example of this is its capital returns policy. Having been rescued by the state during the 2008-2009 crisis, returning excessive cash to shareholders might be seen as being in poor taste.
As always, there are no guarantees. But the UK government no longer having an interest in the business might clear the way for higher dividends and share buybacks in the future.
Acquisitions
A return to private ownership could allow the bank to grow via acquisition. There’s speculation that Banco Santander SA might be looking to divest its UK division, which might suit NatWest.
The obvious benefit would be an increase in its consumer deposit base. This could boost the bank’s profits by giving it access to a bigger pool of capital it can use at a low cost.
In the short term, making acquisitions can be risky. It involves paying out guaranteed cash (or stock) up front in the hope of making a return in the future – and this isn’t certain to happen.
Over the long term, however, I think increased scale could be valuable for NatWest. And Santander isn’t the only possibility that I’ve heard mentioned as a potential opportunity.
Regulation
In general, regulation is probably the biggest risk when it comes to banking stocks – including NatWest. It can change without notice and cause profitability to fall over the long term.
I think, however, there’s a decent chance things become more favourable for UK banks in the near future. And I’m looking at the Chancellor as a source of potential optimism.
The government has made economic growth a priority and this is likely to require investment from businesses. They’ll need capital, which is likely to come from banks.
As a result, I think there’s a decent chance lending restrictions might become more relaxed for NatWest and other UK banks. And this could result in higher returns going forward.
Buy high?
It isn’t easy to see a stock as a potential buy when it’s almost twice as expensive as it was a year ago. But there’s still a lot that could go right for NatWest, especially over the long term.
Investors wanting guaranteed returns should look elsewhere and banks can go spectacularly wrong. Despite this, I think the stock is still worth careful consideration.
