UK banking stocks have started to recover over the past few months, having taken a beating for much of 2020. A mixture of bad debt that was thrown up by the pandemic, along with a low interest rate environment are seen as the main drivers. The bounce-back in the short term has been led by NatWest Group (LSE:NWG). Over the course of February, the share price rallied by almost 25%, making it the best-performing UK banking stock in the FTSE 100. That said, over a one-year period, the share price is down close to 5%.
The extent to which NatWest endured a tricky 2020 was shown by the full-year results that were released last month. The post-tax loss of £753m contrasted sharply to the profit of £3.13bn from the previous year. The losses were understandable, largely due to the impairment of loans that it had to take on the balance sheet throughout 2020. This figure stands around £3.2bn, so I can easily see how this can completely change the accounts for the year.
So what were the positives? Operating expenses reduced, and ended up being lower than 2019 and 2018. It also proved its digital banking capabilities, with 67% of commercial banking sales done via online channels (2019 figure 52%). I think this is a key reason why it was the best UK-performing banking stock last month, with this digital transformation. Other banks are trying to follow suit, but NatWest is leading the charge.
From a regulatory standpoint, NatWest also grew the CET 1 ratio requirements during 2020 to 18.5%. This ratio is a measure of financial resilience, looking at the difference between the bank’s capital versus assets. 18.5% exceeds the needed level, and so this shows me the bank is in a strong position to navigate any future choppy waters.
The best UK banking stock for the year?
One month is a fairly short time frame to judge a stock. Could this be the pick of the bunch for 2021 and beyond? I see a few risks to this view.
Firstly, remember that the UK Government is still a majority shareholder, with 62%. This was carried over from the change of business from RBS to NatWest. As such, the share price could experience much higher volatility in coming years as the Government reduces its stake. If NatWest buys back shares, then this risk lessens. But if the stock is simply sold into the market, then a larger percentage of NatWest becomes public float. This means the share price will become more volatile as a larger proportion of the overall business is being traded by the public.
Secondly, NatWest has limited overseas operations. I feel this limits its ability to grow when I look for the best UK banking stock in general. For comparison, I look at Barclays. The scale of its worldwide reach should allow it to benefit more from economies of scale, especially as the UK comes out of recession.
Overall, I do think NatWest has outperformed its peers in the short term. I wouldn’t buy the stock for long-term gains though, and would prefer to own Barclays. I wrote more about that in detail here.
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.