What happened to the NatWest Group (LSE: NWG) share price? After the bank posted its biggest profit since 2007, it dipped sharply. In early trading Friday, the shares fell a whopping 9.5%.
The price regained a little as the day progressed. But what was the cause of the shock?
Profit before tax in 2022 climbed by a third, to reach £5.1bn. That’s higher than it has been since before the banking crisis. The then-Royal Bank of Scotland famously crashed under the management of Fred “the Shred” Goodwin, nicknamed for his reputation as a ruthless manager.
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Bailed out
RBS had to be bailed out by taxpayer cash, and that’s partly behind some anger that emerged on results day. NatWest boosted its bonus pool to £367m, from £298m in 2021. And chief executive Alison Rose is getting a bonus of £643,000, half cash and half shares.
Some see that as unfair on the same taxpayers who are now paying the soaring interest rates that are helping to enrich bankers. That sentiment is understandable. But what does it all mean for investors? All that should matter, surely, is the long-term returns the bank can generate for shareholders.
While that £5.1bn pre-tax profit is a post-crisis record, bottom-line attributable profit was put at £3.44bn. That’s 13% ahead of 2021, and represents a healthy rate of return.
Healthy return
NatWest’s return on tangible equity (RoTE) came in at 12.3%. In the same week, Barclays posted a 10.4% RoTE, and only hopes for “greater than 10%” in 2023. NatWest, meanwhile, expects a RoTE figure of between 14% and 16% in 2023. I think that would be impressive if it comes off.
Shareholders will receive a final dividend of 10p per share, taking their full-year yield to a fraction under 4%. And the board announced a new £800m share buyback to commence in the first half of 2023.
While all this looks good, we’re seeing something familiar. Results were clearly strong for 2022. But, like Barclays before it, the market found NatWest’s outlook for 2023 disappointing. The latest guidance for 2023 income is a bit below previous expectations. And it seems unlikely that the 2022 interest rate boost will continue so strong in the coming year.
Uncertainty
Analysts also fear increases in impairments across the banking sector. NatWest says it expects something a bit lower than previous estimates. But it’s still very early in what’s looking like an increasingly uncertain year.
But I love uncertainty. When investors fear the unknown, they often sell shares and put their money somewhere they see as safer. That lowers share prices, and that’s when I like to buy.
NatWest shares might well have a volatile year ahead. And I can see them giving up more of their gains of the past few months. But looking at a forecast price-to-earnings (P/E) ratio of only seven for 2023, with a 5% dividend yield, I think there’s plenty of safety buffer already in today’s share price. I rate all of the banks as potential buys for my 2023 Stocks and Shares ISA.
