The steep fall off in global markets over the past few days has sparked some panic from investors. Even though this mainly originated across the pond in America, the impact of concern around a recession is being felt here in the UK. FTSE 100 stocks are being pulled lower, yet there are some that I feel have tumbled too far too fast.
Reasons for the drop
One that I’ve spotted is NatWest Group (LSE:NWG). The banking group is down 13% over just the past week. Yet over the past year, it’s still up 35%.
Some are pointing to the announcement from the government last week as a contributing factor to the short-term drop. This relates to the government pushing back on the idea that it’ll be imminently selling the remaining 19.97% stake that it holds in the bank. I don’t actually see this as a bad thing. Whenever the share sale happens, it’ll be done in an orderly way to avoid any major market impact.
The main reason for the drop is the concern that interest rates around the world are going to fall at a fast pace in order to avoid major economies falling into a recession. Here in the UK, we already got the first cut last Thursday (1 August) from the Bank of England.
A faster pace of cuts would be negative for NatWest, as it would decrease the net interest income it makes. A lower base rate means it can’t make much of a margin between the rate it lends money at versus what it pays on deposits.
Why I’m not worried
I think that the move lower in the share price is overdone. To begin with, we don’t have any clear indications that UK policy makers will be forced to cut interest rates rapidly. This wasn’t communicated in the meeting from the Bank of England last week. I think people are overreacting to some poor data from the U.S.
Further, the volatility in the market could be a good thing for the bank. It has a global markets division, which is actively involved in trading and investing. It also owns Coutts, a private bank that deals with investments for high net worth individuals. The fees and commissions earned over this period of volatility could boost financial performance for the current quarter.
Finally, the fall lower means that the price-to-earnings ratio has decreased to 6.55. In comparison to my fair benchmark figure of 10, NatWest shares are flashing as undervalued. If earnings per share manage to hold at the current level, I’d expect the share price to eventually rally back to a more realistic price.
Pulling it all together
Should things really take a turn south, the risk is that people default on loans and mortgages. This would be a clear negative for the banking group. However, we don’t have enough information that this is anywhere near close to happening.
I’m very keen to buy some of the bank stock in coming days based on the current drop.
