NatWest (LSE: NWG) shares have had a brilliant run. They’ve climbed 60% in the last year and 222% over five.
It’s not the only big FTSE 100 bank making hay. Lloyds Banking Group is up 62% over one year and 215% over five. Barclays has outperformed both, rising 70% and 287% over the same periods. Happily, I’ve joined in the fun. I bought Lloyds a couple of years ago and have already more than doubled my money with dividends reinvested. That’s the joy of investing in blue-chip UK shares.
FTSE 100 success story
Higher interest rates have been a huge help, widening net interest margins, the gap between what banks pay savers and charge borrowers. Lending volumes remain robust, while costs have been controlled and bad debts kept low.
NatWest finally shed the last constraints of public ownership in May, when the UK government sold its final stake after 17 years. This removed any potential government interference and gave investors confidence that management decisions could be made freely. Cost-cutting and operational efficiency also bolstered profits.
Strong results
And there have been plenty of those.
NatWest’s operating profit before tax in 2024 was a hefty £6.2bn, while 2025 looks promising too. The bank’s Q3 update on 24 October showed net profits up 35% to £1.68bn, helped by lower operating expenses and falling impairment losses. The bank upgraded its income and returns guidance for 2025. Barclays and Lloyds are producing similarly upbeat statements.
Even so, there are risks on the horizon. The UK economy is in a poor state. That could hit demand for loans and mortgages, and increase impairments. There’s another concern. The Budget on 26 November could bring calls for a higher windfall tax on banks.
Campaigners are pushing to lift the current 3% surcharge to 8%. If it happens, that would definitely hit banking stocks on the day, and for a while thereafter. The charge is estimated to raise £8bn over four years, across the sector, which would obviously eat into profits, although hardly devour them the way things are going.
Potential margin squeeze
It could prove more damaging if interest rates fall substantially next year as inflation subsides, putting margins under pressure. Nervous investors may want to wait to see how that pans out, although the danger is if we don’t get the surcharge, they’ll miss the subsequent share price hop.
Trying to time these things can drive investors mad. That’s why we at The Motley Fool, prefer to take the long-term view. In my view, a balanced portfolio needs exposure to the banking sector. It’s a key source of dividends and growth. With that in mind, I think all three are worth considering today, whatever the budget brings.
They’re not exactly expensive. NatWest trades on a price-to-earnings ratio of 11.2, Barclays at 11.25, and Lloyds at 14, all below the FTSE 100 average of 18. Dividend yields are attractive and given their profitability, investors could earn decent income while watching for market developments.
Long-term view
Banking stocks are cyclical and sensitive to the economy and rates, but the fundamentals are strong. Even if the Budget shakes confidence briefly, over the longer run, the rewards should flow.
