Can the NatWest share price keep on climbing?

At NatWest Group (LSE: NWG) share price has risen in 2023, after rising last year in 2022. Since the bull run started in October, NatWest shares have gained 45%.

The value of bank shares rose in the sector. On the same time scale, Lloyds Banking Group and Barclays have recorded similar results.

NatWest’s share price is now higher than pre-pandemic levels. So, will the price hike soon run out? Or is there more to come? Much may depend on the results of the full year 2022, due on February 17.

Optimism

It seems investors are optimistic now. But if the results don’t quite meet expectations, I wouldn’t be surprised to see the stock price fall further. The bank’s dividend outlook and plans for the coming year may be very important.

I will look for bad debt provisions, among other things. If you are criticizing the way banks have handled similar issues during the Covid pandemic, I think you might be a bit pessimistic. But I prefer to see an abundance of caution, followed by some reversals of impairment, than the risk of any cash flow crisis.

At the end of the third quarter, the bank considered it was still on track to meet its planned return target. Real equity returns in 2023, he said, should be in the 14-16% range. But with changing economic conditions, the mix should be different than previously expected.

interest rate

Higher interest rates should boost NatWest’s earnings for the year. But costs become less stable as inflation increases. The end of 2023 is still a long way off, and it could be an uncertain year for the financial sector.

On the valuation front, NatWest shares are at a price-to-earnings (P/E) ratio of around 10 based on expectations for 2022. That is relatively modest compared to the long-term FTSE 100 average. But with the economic risks we face over the next 12 months, I can’t help but wonder if that could be a fair value right now.

In contrast, City experts have Lloyds at P/E 2022 less than eight. And Barclays times only around 6.5.

Dividends

NatWest’s dividend was also a weaker fraction, with forecasts suggesting a yield of 4%. At Lloyds, we saw a 4.3% yield as predicted.

So, on the one hand, NatWest appears to be more valued than other banks. But then, what represents lower risk? Lloyds, the UK’s biggest mortgage lender, is more at risk from housing market pressures. It will be interesting to see how much credit risk Lloyds thinks is needed in 2023. And Barclays is open to commercial banking and international risk.

Verdict

So what’s my verdict on NatWest’s current share price? I still see the entire banking sector as undervalued. And I plan to buy more bank stocks during 2023 for the long term.

But the margin of safety compared to the risk seems to be decreasing. I think NatWest shares remain quite good value. But Lloyds is still my pick in the sector.