The past year has been an excellent one for shareholders in NatWest (LSE: NWG). The NatWest share price has grown by 50%. That means it now stands a stunning 266% above where it was five years ago. So much for banks being boring!
Despite that increase, the share trades for just 8 times earnings. It also has an attractive yield of 4.5%, handily beating the FTSE 100 average.
So could things get even better from here – and ought I to consider buying some of the shares for my portfolio?
Strong recovery
Five years ago, the outlook for banking was unclear. The long-term economic impact of the pandemic remained to be seen. That uncertainty was reflected in the share price of UK banks, including NatWest.
Since then, it has become fully private again, with the government selling the last of its stake acquired during the 2008 financial crisis.
It is performing well as a business. In the first quarter of this year, for example, NatWest’s profit grew 36% year-on-year to £1.3bn.
With well-known brands such as NatWest and Royal Bank of Scotland, a proven business model and large customer base, I reckon the company can keep on doing well as long as the UK economy ticks over.
While some London-listed banks like HSBC and Barclays are heavily reliant on international markets, NatWest’s domestic focus gives it some insulation from the ups and downs of foreign markets.
Cheap-looking valuation – or is it?
That does not mean it is completely immune to them, of course. After all, the global financial markets are interconnected.
But, if the UK economy does fine and loan defaults do not increase markedly, I reckon NatWest should keep doing well. In its most recent quarter, the bank’s finance chief said: ”We continue to see stable levels of default across our portfolio”. I regard that as reassuring.
The price-to-earnings ratio of 8 I mentioned above looks cheap. However, many investors prefer to value banks based on their book value. Here, the Natwest share price starts to look like less of a bargain. It is very close to the book value, making for a price-to-book value ratio just above 1.
That does not offer me as a prospective investor any discount to book value. But book value could fall sharply, for example if a weak economy leads to higher loan defaults and means the book value of the bank’s assets falls.
What I’ll do next
That could limit the upwards momentum of the Natwest share price. If it turns in a particularly good set of results, it may boost the share price. But I would be surprised to see anything like the 50% gain of the past year in the coming 12 months.
However, I do not think the current valuation offers me sufficient margin of safety. I remain concerned about an uncertain outlook for the UK economy and the negative effect that could end up having on the housing market. That might be bad for loan default rates too.
For now, then, I do not plan to add Natwest into my portfolio despite its strong recent momentum.
