FTSE 100 ‘Big Four’ bank NatWest (LSE: NWG) has rocketed over the last 12 months. That has left many investors asking whether there is still any point in looking at the stock today.
I believe there is — and it comes down to the gap between price and value. The two are not the same. And in that gap, long-term profits are often hiding in plain sight.
So just how wide is it?
Mind the gap
One of the most reliable ways I have found to gauge a stock’s value is through the discounted cash flow (DCF) model.
It determines where a stock ought to be priced, based on how much cash the business is expected to generate.
In NatWest’s case, it shows the shares are 42% undervalued at their current £5.99 price.
Therefore, their fair value is £10.33.
Another benefit of this approach is that it remains unaffected by how the rest of the sector is priced.
However, a cross-check of NatWest’s key financial metrics valuation with those of similar banks also highlights how cheap it looks.
For example, its price-to-earnings ratio of 8.9 is bottom of its peer group, which averages 12.3. This comprises Barclays at 9.5, Standard Chartered at 10.1, HSBC at 14.5, and Lloyds at 15.2.
A strong underlying business?
I believe the bank’s 24 October Q3 2025 results highlight the strength of the underlying business, which is supporting the share price.
Profit before tax rose a stellar 30.4% year on year to £2.18bn. This came on the back of a 15.7% increase in total income to £4.33bn.
A key risk to the share price is that falling UK interest rates could squeeze earnings.
That said, NatWest shifted its strategy a while back to try to mitigate this. Specifically, it focused more on fee-paying rather than interest-paying business.
In fact, over Q3 2025 compared to the same quarter last year, non-interest income jumped 25.9% (to £0.91bn). Meanwhile, net interest income rose a less startling 12.7% (to £3.09bn).
Net interest income is the difference in interest charged on loans and paid on deposits.
Upgraded guidance
As a result of these figures, the bank upgraded its guidance for the whole of 2025.
It now forecasts income of around £16.3bn compared to around £16bn previously.
It also projects return on tangible equity (ROTE) – a key profit measurement for banks – at 18%+, up from 16.5%+.
As with 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.
Given these rising numbers, analysts also forecast that its dividend yield will rise from 3.6% to 6.5% by end-2027.
My investment view
I added to my NatWest holding very recently after it dipped slightly in price before the Q3 results.
However, given its still huge undervaluation (backed by strong underlying business results), I will be buying more soon.
There are also several other highly undervalued stock opportunities I am keeping my eye on.
