NatWest (LSE: NWG) shares have had a blistering run. They’re up 50% over the last year and 335% over five years, with dividends on top.
The other FTSE 100 banks have done well too. Barclays (LSE: BARC) is up 60% and 235% over the same periods, while Lloyds Banking Group (LSE: LLOY) has climbed 38% and 195%. Finally, they’re putting the havoc of the financial crisis behind them.
Yet nothing climbs forever and lately they’ve hit a bump. It started with talk of a possible windfall tax on banks in the next Budget. That could hang over their share prices until 26 November, but in truth there’s always something worrying investors in the banking sector.
Core FTSE 100 sector
Scandals and regulatory missteps are rarely far away. Lloyds shareholders know this all too well after the motor finance fiasco, which at one stage threatened tens of billions of pounds in compensation claims. That risk has eased, but it shows how banks can still spring nasty surprises.
Even after their strong run, the big banks still look decent value. NatWest trades on a modest price-to-earnings ratio of 9.9. Barclays (10.3) and Lloyds (12.8) are a little pricier, but all three remain well below the FTSE 100 average of around 15.
They also look cheap when judged by book value. Barclays trades at just 0.7, Lloyds at 1 and NatWest at 1.05. On the income front, Barclays is forecast to yield 2.5%, covered a healthy 4.7 times. Lloyds is expected to yield 4.5%, covered 2.1 times. NatWest tops the lot, with a bumper 5.95% yield covered twice. Dividends are never guaranteed, but these look solid.
Operating margins are expected to rise too. Barclays is forecast to climb from 30.3% to 37.9%, Lloyds from 17.4% to 41.4%, and NatWest to an impressive 47.5%.
Balancing investment risks
The outlook seems impressive but there are challenges. Business failures remain relatively high, which could feed through to loan impairments. Sticky interest rates are acting as a brake on the housing market and hurting borrowers and businesses. Yet those same higher rates are supporting margins, so if they fall banks will feel the squeeze.
September and October can be choppy months for markets, and a wider correction can’t be ruled out. That’s the nature of investing. Any stock or sector can take a tumble, at any time.
What forecasts suggest
So what do analysts expect over the next 12 months? They seem reasonably upbeat. The consensus is that Barclays shares could climb 12.4% to around 405p. Add in the forecast yield and the total return would be 14.9%, turning £10,000 into £11,490. Barclays also has an active share buyback programme, which adds another layer of support (personally I prefer dividends).
Lloyds is forecast to rise 14.75% to 91.06p, giving a total return of 19.25%. That would lift £10,000 to £11,925.
The most optimistic forecasts are for NatWest, with a potential 17.71% gain on the share price to 5.95p. With the dividend, that takes the total return to 23.66%, which would turn £10,000 into £12,366.
These numbers are only projections, but it’s encouraging that the market thinks the sector has more to give. The banking sector is back, and I think investors can still consider buying, with a long-term view.
