NatWest’s (LSE: NWG) share price rose around 5% at one point on Friday (16 February) on much-better-than-forecast 2023 results.
The bank made its biggest profit since the £10bn it made in 2007, just before the Great Financial Crisis (GFC) began.
The £6.2bn in pre-tax profit was also 20% higher than in 2022 and beat consensus analysts’ forecasts of £6bn.
Positively for shareholders – of which I am one – it also announced a £300m share buyback. These tend to be positive for a stock’s price.
The company also made permanent Paul Thwaite’s former interim position as CEO. So, should I buy more?
The major headwind coming
As a long-term investor nowadays, rather than the investment bank trader I was, I am not troubled about buying a rising stock.
My only concern is whether value remains. A key part of ascertaining this is to look at whether a business looks set for further growth.
In NatWest’s case, I think the answer is yes, but probably not as much as seen in the past year.
Like all major UK banks, it has benefitted from a high net interest margin (NIM). This is the difference between the interest it receives on loans and the rate it pays for deposits. The strong NIM resulted from high interest rates required to combat rising prices.
However, inflation has now fallen from its 11% high in 2022 to around 4%. Analysts’ expectations are that interest rates may have peaked as well. This will bring the banks’ NIMs down, and very probably profits with them.
Strong core business
NatWest lowered its Return on Tangible Equity (ROTE) forecast — a key measure of banks’ profitability — from 14%-16% for 2025/26. The 2025 target is now “around 12%” and “greater than 13%” for 2026.
It also expects total income in 2024 to drop to £13bn-£13.5bn, from £14.8bn this year.
However, these figures would still leave a very healthy business, in my view.
Despite the ongoing cost-of-living crisis, the bank only needed to set aside £126m for bad loans. This compared to analysts’ expectations of £242m.
It also increased its deposit base in Q4 by 1.9%.
Undervalued against its peers?
The stock has lost 22% from its 12-month 3 March high of £2.96.
On the key price-to-earnings (P/E) measurement, NatWest trades at just 4.4 against a peer group average of 6.2.
However, Standard Chartered at 10.8 skews the figure, with NatWest slightly higher than Barclays at 4.1 and Lloyds at 4.3, while HSBC Holdings is at 5.5
A discounted cash flow analysis shows NatWest shares to be around 59% undervalued at their present price of £2.30. Therefore, a fair value would be about £5.61, although the shares may never reach that price, of course.
A true high-yield stock
A true high-yield stock is one that offers a return of over 7%, in my view. NatWest — uniquely among the UK’s big banks — fits this bill.
In 2023, the interim dividend was 5.5p and the final dividend was 11.5p.
The 17p total for 2023 gives a yield on the current £2.30 share price of 7.4%.
This high dividend, strong core business, and very undervalued shares in my view, means I will be buying more NatWest stock very soon.
