The NatWest (LSE: NWG) share price has risen a staggering 58% over the past year. Unfortunately, despite this performance, the stock still trades below the level at which it began in 2020. Shares in the lender, formerly known as Royal Bank of Scotland, ended 2019 at around 240p. Its performance over the past three and five years is even less impressive.
The stock has returned -5.9% per annum over the past three years, including dividends paid to investors. It has also returned -1.6% per annum over the past five years.
Based on these figures, the stock has underperformed the FTSE 100 by around 7.6% per annum over the past half-decade.
Still, past performance should never be used as a guide to future potential. I think the NatWest share price outlook is improving, which is why I’m considering adding the stock to my portfolio today, despite its poor historical returns.
NatWest share price opportunity
Before the coronavirus pandemic struck, it looked as if the lender was finally moving on from its financial crisis bailout. The group restarted dividends in 2018 and doubled the payout to investors in 2019. Post-tax profit increase to £3.1bn in 2019, and it looked as if, after a decade of significant write-downs and losses, the bank was finally back on a sustainable footing.
Then the pandemic slammed into the UK financial sector. Natwest alone expects to incur £3.2bn of loan losses as a result of the crisis. Without these losses, the group would have reported operating profits of nearly £4bn in 2020.
However, despite the challenges the group has faced over the past year, the crisis has been somewhat of a blessing in disguise.
Yes, the group is set to lose billions from bad loans, but its capital ratio jumped to 18.5%. That’s the highest level in years. I think this bodes well for future returns from the NatWest share price.
Indeed, management has already found something to do with the excess cash.
Today, the bank announced it will buy back £1.1bn of shares from the government. This will reduce the government’s shareholding of the lender to around 59.8% from 62% at present.
As well as this share buyback, there’s also been speculation the lender will look to return a large amount of cash to investors with a special dividend, although this is far from guaranteed.
I think these capital returns could be a sign of things to come. NatWest has had a challenging year, but the business could recover relatively quickly if the economy rebounds as analysts are expecting.
That said, it’s unlikely to be plain sailing for the group from here on out. There’s no guarantee the economy will rebound. Another coronavirus wave could cause more corporate bankruptcies, which would place further pressure on NatWest’s balance sheet.
The organisation also faces headwinds from low-interest rates. It looks as if these are here to stay, which implies the bank’s profit margins will remain under pressure.
Nevertheless, despite these risks and challenges, I think the NatWest share price could be an excellent way to invest in the UK economic recovery. As such, I’d buy the stock for my portfolio today.
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Rupert Hargreaves 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.