Despite the recent volatility being largely isolated to US and Swiss banks, the rout in banking stocks was far reaching and UK banks, including NatWest, suffered.
With NatWest shares having given up all of this years gains after a questionable outlook for 2023 in their full year results and external pressures from global banking sector volatility, the company is now at a level that may provide an entry point for investors looking to add the bank to their portfolio.
US & UK Bank valuations
Notwithstanding the sharp drop in banking shares, the valuation of the world’s largest financial institutions have been under the microscope in recent weeks.
The valuation trends of UK banks differ significantly to US banks and much was made of the low price-to-book ratio of some of the US regional banks in the midst of the recent volatility.
In fact, after the US regional banks had lost around 80-90% of their value, their price-to-book valuation was the same as UK banks’ long term average.
For example, First Republic Bank trades around 0.2x book value, even after losing much of its value. Barclays trades at 0.3x book value and hasn’t traded a premium to book value for years.
NatWest, like most FTSE 100 banks, trades at a discount to their book value. This has become normal since the financial crisis but also suggests poor sentiment attached to UK banks. NatWest trades at 0.7x book value; the same as Lloyds, but slightly higher than Barclays.
Nonetheless, compared to their peers, NatWest will be starting to catch the eye of investors seeking a yield and opportunity for capital appreciation.
NatWest Dividend Yield
After years offering a dismal yield, NatWest has slowly become a company that provides a respectable yield to investors. With a 5.4% historical yield, NatWest has the attributes many income investors would look for. A dividend cover of 2.9 means ample space for increased payouts in the future.
With Natwest currently trading around 6.4x historical earnings, the shares don’t appear to look attractive compared to peers. However, Natwest was not as heavily hit during the recent bout of volatility which suggests the market feels the company deserves a premium valuation to peers.
2023 Outlook
Although total income grew 28.3% to £2,877 million in 2022, the outlook for 2023 was punctuated by a predicted peak in net interest margins.
This will curb enthusiasm for banking shares as it will cap earnings potential.
In addition, the fluid state of the UK economy should be a consideration for NatWest shares, despite forecasts from the OBR and Bank of England improving of late.
Natwest’s earnings growth isn’t the main event, rather relative value global banking averages.
