Over the past year, NatWest (LSE: NWG) has been an excellent investment for many shareholders. NatWest shares have moved up 91% during those 12 months. On top of that, the FTSE 100 bank offers a dividend yield of 4.1% and has grown its ordinary dividends per share significantly over the past three years.
Despite the massive rise in price, NatWest shares continue to sell for a bit less than nine times earnings. That looks potentially cheap to me. So is it worth adding the bank to my portfolio now in the hope of future gains?
The outlook for banks seems uncertain
Stepping back from NatWest specifically, as an investor I feel the market’s outlook for UK banks must have changed significantly to justify the sort of price action we have seen over the past year.
NatWest’s 91% rise is huge. But during the same period, Lloyds has moved up 45%, Barclays 97% and HSBC 34%. So it seems as if the City reckons that the outlook for UK banks in general now looks markedly stronger than a year ago.
That reflects the economy being a bit more resilient than was feared, economic optimism globally coming in 2025 has been boosted in some regions as shown in strong stock market performance and the potential for central banks’ moves on interest rates to improve growth rates.
Still, is that enough to justify soaring bank share prices? The economy may be wobbling less than feared but it still feels pretty fragile to me, both on a UK and global perspective. The risk of a slowing economy also brings risks of higher loan defaults, hurting profits at banks including NatWest.
This share could keep moving up, but will it?
Another factor specific to NatWest has been the UK government selling down the stake in the bank it had held since bailing it out during the 2008 financial crisis. This week, that fell below the 8% level.
Reducing then eliminating the government shareholding could, over time, lead to a lower number of shares in circulation and so push up earnings per share. That could boost the share price.
The bank’s earnings in the first nine months of last year showed year-on-year growth of 4%. With over 19 million customers, strong brands and a proven business model in a space I expect to keep seeing high demand, I think the well-known bank could keep doing well. That could push NatWest shares up.
On the other hand though, I wonder whether the market has been too quick to dismiss those economic risks. NatWest’s strengths today were true a year ago too. A 91% share price rise feels steep to me in those circumstances.
I think the global economy remains weak and swathes of the British economy are looking distinctly shaky. I remain concerned about the risk that poses to banks’ earnings — and their share prices. NatWest, for now at least, is not on my stock market shopping list.
This post was originally published on Motley Fool
