NatWest (LSE: NWG) shares are the biggest faller on the FTSE 100 this morning (9 February), down almost 5% as I write this. Lloyds Banking Group (LSE: LLOY) is next, down almost 2%. That’s despite a generally positive start for the blue-chip index.
This isn’t the first time these UK-focused banks have taken a knock in recent days. They fell 6% and 5.6%, respectively, on 5 February. What’s going on?
Shares go up and down all the time, and these aren’t exactly earth-shattering moves. Long-term investors won’t be complaining. NatWest shares are up almost 50% over 12 months, despite the recent dip. Lloyds is up 70%. Over two years, the two have grown 199% and 155%, respectively, plus some pretty generous dividends. But investors may be wondering if the banking stock party is finally drawing to a close.
FTSE 100 banks slip
The main reason the shares fell last Thursday was the Bank of England. It froze base rates at 3.75%, but hinted that more cuts are on the way, possibly as early as March. That may spell bad news for banks, because lower interest rates compress net interest margins, the difference between what they pay savers and charge borrowers. It’s a key profitability metric.
That’s a major reason why banking stocks have flown in recent years, so it’s no surprise investors are getting nervous. Especially as the shares are no longer as cheap as they were.
NatWest doesn’t look too pricey on a price-to-earnings of 12.6, but the Lloyds P/E is up to 15.25. Both their price-to-book ratios are around 1.2. Hardly expensive, but no longer screaming bargains.
NatWest’s fall today looks to be a market reaction to news that it has agreed a £2.7bn deal to buy UK wealth manager Evelyn Partners. It’s the bank’s biggest acquisition since it was bailed out by taxpayers in 2008.
Broadly, I see this as good news. One concern I have about them is that as UK-focused banks, NatWest and Lloyds have has less room to grow than global players like Barclays and HSBC Holdings. NatWest CEO Paul Thwaite hopes to address that by pushing into more lucrative areas such as private banking and wealth management. That said, any acquisition carries risk. It might not work, or it might prove difficult to integrate.
Dividends and share buybacks
I’m less sure why Lloyds is falling today. Its smaller drop may simply reflect broader investor nervousness about the UK economy. Barclays and HSBC, for example, are relatively steady.
Dividend yields are lower than they were, thanks to those soaring share prices. NatWest now yields around 3.8% on a trailing basis, with Lloyds at about 3.4%. They should rise though, over time. Plus there’s also scope for share buybacks. In fact, NatWest launched a £750m buyback this morning, a sign the sector is still flush with cash.
I think both NatWest and Lloyds are well worth considering. Investors need to take a long-term view though, as the shares could slow or even retreat after their strong surge. If that happens, I’d see it as a potential buying opportunity to think about.
