Earnings: is the NatWest share price cheap, after bumper profits?

What happened in NatWest Group (LSE: NWG) share price After the bank posted its biggest profit since 2007, it fell sharply. In early trading on Friday, the stock fell 9.5%.

Prices rise slightly as the day progresses. But what is the cause of the shock?

Pre-tax profits in 2022 rise by a third, to £5.1bn. That is higher than before the banking crisis. The then famous Royal Bank of Scotland collapsed under the management of Fred “the Shred” Goodwin, so nicknamed for his reputation as a ruthless manager.

It is hidden

RBS had to be bailed out by taxpayers’ cash, and that was partly behind some of the anger that arose on the day of the results. NatWest increased its bonus pool to £367m, up from £298m in 2021. And chief executive Alison Rose got a £643,000 bonus, half in cash and half in shares.

Some see it as unfair to the same taxpayers now paying the rising interest rates that helped the bankers. The sentiment is understandable. But what does it all mean for investors? What matters, of course, is the long-term returns the bank can generate for its shareholders.

While the pre-tax profit of £5.1bn was a post-crisis record, the underlying attributable profit was £3.44bn. That’s 13% before 2021, and represents a healthy rate of return.

Come home healthy

NatWest has a real return on equity (RoTE) of 12.3%. In the same week, Barclays posted a RoTE of 10.4%, and only hope “more than 10%” in 2023. NatWest, meanwhile, expects a RoTE figure of between 14% and 16% in 2023. I think that will be impressive when it comes to death.

Shareholders will receive a final dividend of 10p per share, taking the full year’s results to a fraction of 4%. And the board announced a new £800m share buyback to start in the first half of 2023.

While this all looks good, we see something familiar. Results are clearly strong for 2022. However, like Barclays before it, the market finds NatWest’s outlook for 2023 disappointing. The latest guidance for 2023 earnings is slightly below previous expectations. And it seems unlikely that the 2022 interest rate hike will continue strongly next year.

Indefinite

Analysts also fear increasing defects in the banking sector. NatWest said it expected that to be lower than previous estimates. But it’s still very early in a year that looks uncertain.

But I like uncertainty. When investors fear the unknown, they often sell stocks and put their money somewhere they think is safer. That drives down the stock price, and that’s when I like to buy.

NatWest shares may have had a volatile year. And I can see them giving up more of their gains over the past few months. But looking at the price-to-earnings ratio (P/E) of only seven for 2023, with a dividend yield of 5%, I think there is already a lot of safety buffer in the current share price. I rate all banks as a potential buy for 2023 Stocks and Shares ISA.