FTSE 100 ‘Big Four’ bank NatWest (LSE: NWG) has seen its share price rise since its H1 results were released on 25 July. And they are now trading not far from their 4 June one-year high of £5.37.
That said, it is crucial to remember in circumstances such as these that price and value are not the same thing. Price is whatever the market will pay for an asset at any given time. However, value is what that asset is fundamentally worth, based on the strength of the underlying business.
Understanding this difference and being able to quantify it in individual cases is where big long-term profits lie, in my experience. This experience comprises several years as head of sales and/or trading at major banks and 35 years as a private investor.
The price-to-value balance
A broad indication of unidentified value in any stock is how it compares on key measures to its competitors.
NatWest’s 8.6 rating on the price-to-earnings ratio is bottom of its peer group, which averages 10.7. These comprise Barclays at 9.1, Standard Chartered at 11, HSBC at 11.3, and Lloyds at 11.5.
So, it is very undervalued on this key metric.
That said, I have found the best way of nailing down the exact value in any stock is discounted cash flow analysis.
This determines where any firm’s stock should be trading, based on cash flow forecasts for the underlying business.
The DCF for NatWest shows its shares are 48% undervalued at their current £5.11 price.
Therefore, their fair value is £9.83.
Does performance support this view?
A risk to the bank is increasing competition in the UK sector, particularly if Santander’s agreed purchase of TSB proceeds. The deal – which would see Santander take on TSB’s five million customers — is subject to regulatory approval. If it receives this, it is expected to be finalised in Q1 2026.
That said, NatWest’s H1 2025 operating profit before tax rose 18.4% year on year to £3.585bn, outstripping analysts’ forecasts of £3.46bn.
Its net interest income (NII) rose 13.2% over the period (to £6.12bn), while non-interest income increased 8.1% (to £1.865bn). NII is the difference in money made from interest charged on loans and paid out on deposits.
Given these numbers, NatWest announced a share buyback of £750m, which tends to support share prices.
It also upgraded its key return on tangible equity (ROTE) performance guidance for this year to 16.5% from 16%. As with ROE — or return on equity — ROTE is derived by dividing a firm’s net income by average shareholders’ equity. However, ROTE does not include intangible elements such as goodwill.
I believe a further positive factor for the bank was the 30 May statement that it had returned to full private ownership. This marks the end of a dark period for the business that saw it bailed out by the government during the 2007/08 financial crisis.
Will I buy more of the shares?
I have held NatWest shares for years and have looked to add to that holding during periods of extreme undervaluation.
I believe that the stock is now trading at a price around half of its fair value.
Consequently, I will buy more of the shares very soon.
