Banking giant NatWest (LSE: NWG) released its third-quarter results report today. And profits before impairments for the three months to 30 September rose by around 37%. That’s when compared to the equivalent period of the prior year. However, overall pre-impairment profits for the first nine months of the year slipped by around 2.5%.
Of course, the prior year of 2020 saw the country in the grip of the darkest moments of the pandemic. Economic activity practically ground to a halt at times. And I’d imagine businesses saw reduced opportunities to generate profits, including the banks. So I find it unsurprising to see the three-month figure higher this year.
Profits have roared back
One paragraph in today’s report has the sub-heading, Our Purpose in Action. And it reads: “We champion potential, helping people, families and businesses to thrive. If they succeed, so will we.” And, to me, the obvious flip-side of that statement is that if they don’t succeed, neither will NatWest.
And the business has so far come roaring back this year. After all, many stock market companies have seen bountiful profits and rocketing share prices in 2021. And that’s probably true in the private sector as well. It’s not a big stretch for me to imagine many cash-flush individuals and enterprises being the bank’s customers.
But I think looking at profit figures before impairments is a good way of trying to understand the progress of a business in its day-to-day trading. Impairment occurs when the fair value of an asset is lower than the carrying value on the balance sheet. And when that happens–bang — the profit figure gets hit.
That’s because the impairment loss records as an expense in the current period. And after that, the profit number and the asset value on the balance sheet will be lower. However, such markdowns don’t affect the real cash flowing into a business from trading.
Why NatWest is a ‘black box’ to me
But I’d be the first to admit the financial statements of the banks can be complex. To me, listed banks operate like black boxes that I can’t really see inside — at least not properly. Sometimes I can a bit– with enough time and work on analysing financial statements. But there’s tremendous scope for error because there are often so many moving parts.
The fault is my own. But it does beg the question, is it worth me investing in bank stocks at all? On top of the difficulties regarding research, there’s the whole issue of the cyclicality of bank businesses to deal with. And for me, timing investments into and out of cyclical stocks is tricky.
However, the stock may yet do well from where it is now. With the share price near 223p, the forward-looking dividend yield is estimated to be just above 4% for 2022. And there’s no sign of any reduction in the shareholder payment ahead — at least for the time being. Meanwhile, the price-to-book value is running below 0.8, making the valuation look reasonable.
But NatWest isn’t for me right now. However, I’ll continue to seek stock opportunities in sectors other than banking.
