The FTSE 100 is packed with UK shares that I think should thrive in 2021. But NatWest Group (LSE: NWG) is one mega cap I won’t be adding to my Stocks and Shares ISA. The risks for this British bank are considerable, not only as the UK economy struggles but as competition in the banking sector hots up.
The possibility of bad loans spiking and revenues sinking are not the only worry for the banks. The likes of NatWest have stepped up cost-cutting in response to the pandemic. And more branch closures are in the crosshairs to help support these UK shares’ bottom lines. Their ability to keep slashing expenses might take a whack if recent regulatory intervention is any indication, however.
The FCA gets stuck in (again)
Last week the Financial Conduct Authority (FCA) called on Britain’s banks “to consider pausing or delaying new branch closures where possible, particularly where this could have significant impact on vulnerable customers.” The body rolled out new rules in September requiring banks to assess the impact of closures on their customers and for them to disclose plans to ensure they are “treated fairly”.
NatWest and its peers have closed hundreds of branches in recent years as digital banking has taken off. This has caused no shortage of concern from the regulator, consumer groups, and from MPs on the Treasury Select Committee. The FCA has made its latest intervention as it fears Covid-19 lockdowns will make it even harder for customers to reach a branch. But it could have long-term ramifications ofr the cost-cutting plans of the banking sector.
A pricey UK share
As I say, I won’t be buying NatWest shares in 2021. But there are reasons why the bank’s share price could perform strongly in the months ahead. Signs that the domestic economic recovery is beginning to click through the gears could lift investor appetite for such cyclical shares.
And news that the FTSE 100 company’s balance sheet has continued to strengthen might improve market interest too. This would raise speculation that NatWest will start paying dividends again after canning them in early 2020. Latest financials showed the bank’s common tier equity (or CET1) ratio improving to a mighty 18.2% as of the end of September. This was up a full percentage point from the halfway point of 2020.
City analysts reckon NatWest will recover strongly from Covid-19-hit 2020. They think it will move back into profit in 2021 after reporting losses last year. And they predict that the UK share’s earnings will soar more than 170% year on year in 2022.
These projections leave the bank trading on a forward price-to-earnings (P/E) ratio of 28 times. But I feel it’s a hefty reading that leaves NatWest’s share price in danger of sinking should trading conditions remain tough for longer and profits disappoint. All things considered, I’d rather buy other UK shares for my Stocks and Shares ISA today.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.