Image source: NatWest Group plc
The past five years have been rewarding for shareholders in the FTSE 100 the bank Natwest Group (LSE: NWG). A lot rewarding. During that time, Natwest shares rose 262% in value.
In addition, the shares are yielding 3.9% even now – above the FTSE 100 average.
But someone who invested five years ago, at the low share price at that time, will get a yield of close to 14%. For blue-chip banking stocks the best yield.
Could the share continue to rise – and might it make sense for me to add it to my portfolio?
Overpriced or not?
It may sound surprising given that Natwest shares have more than tripled in free value over the past five years, but I don’t think the current price is too high to justify.
The price-to-earnings ratio, for example, is close to 10. That is very low for me and significantly lower than the FTSE 100 average.
However, at the moment, the price-to-book ratio doesn’t look very attractive to me. This is the most commonly used measurement when it comes to evaluating bank stocks.
Currently, Natwest shares are trading at above book value. That doesn’t necessarily make the share overvalued, as in fact other soft assets such as trusted brands and long-standing customer relationships can be more valuable to a business than can be fully captured on the balance sheet.
However, a price-to-book ratio of more than one (meaning that the price is higher than the book assets per share) suggests that the rising price has reduced the attractiveness of its valuation now compared to a few years ago.
Opportunities to earn more
Given that, can the share price continue to rise?
In some cases, I think it can. Loan defaults are still under control and the bank is very profitable. It made £1.7bn in the latest quarter alone.
Its UK focus, large customer base, and proven business model means it can continue to generate revenue as long as the UK economy remains relatively healthy, I think.
The economy doesn’t even need to do particularly well, I think, as long as it stays healthy enough that mortgage payments don’t go up too much.
In the latest quarter, not only was the impairment loss lower than the previous quarter, it was significantly lower than the same quarter last year. That suggests that, for now at least, the loan default is not a thorn in Natwest’s side.
If things stay on an even keel, I think Natwest shares could go even further.
So here I am waiting
Despite that, however, I have no intention of buying Natwest shares.
Business is doing well and income is high. But I continue to see a risk that the fragile UK economy could quickly turn weak. Right now, the economic momentum feels weak.
In such a case, loan defaults can increase significantly. With Natwest’s UK focus, it would suffer in such a situation.
I don’t feel that the current share price gives me enough of a margin of safety to account for that possibility.
