If I’d invested £500 in NatWest shares 1 year ago, here’s what I’d have now!

NatWest (LSE:NWG) stock is often overlooked in my opinion. It is one of the UK’s biggest banks with a market cap of £25bn, but it doesn’t get as much attention Lloyds, Barclays, HSBCor even smaller Standard Chartered.

The bank, which is still 42% owned by the British government, has been on hold in recent weeks. The stock fell 10% for the month after fears spread from the US banking sector about unrealized bond losses.

So, let’s take a closer look.

A good year

Despite falling 10% over the past month, the UK-focused company is up 12% for the year. Add in 5% yield, and we’re looking at a total return of 17%. That is clearly very strong. So, if I invested £500 in NatWest a year ago, today I have £585.

The growth picture is actually even stronger over three years. We can see that the stock is up an incredible 109% during that period. But of course, the past three years marked the beginning of the first lockdown and some investors see Covid as an existential threat to our way of life, so the post-pandemic jump is not surprising.

Low price?

With NatWest shares dipping in March, I’ve been topping up my holdings.

In February, the lender posted pre-tax profits of £5.1bn for 2022, up 33.5% from £3.84bn a year earlier and in line with forecasts. This is the biggest income since the 2008 financial crash when it took a £45bn government bailout.

With these corrections and earnings, NatWest now trades at a price-to-earnings ratio of just 7.2. Obviously not a big figure. In fact, it is lower than the average index, around 12-13 times.

However, there seems to be some debate about whether the interest rate tailwind will continue, with some analysts suggesting that Net Interest Margins (NIMs) have peaked.

This may be true as we are nearing the peak of interest rate hikes. But I think banks will prosper in a slightly lower interest rate environment. When the Bank of England rates are around 2% or 3%, the Net Interest Income is large enough, potential borrowers will not have to pay repayment fees as much as they do now, and disability costs will be lower.

I’m buying now with medium-term interest rate forecasts showing BoE rates will be in this sweet spot.

Unrealized bond losses?

Answer: The last thing to address is unrealized bond purchases. The idea that banks are sitting on billions of losses is the main reason for the recent correction.

But NatWest has nothing in common with Silicon Valley Bank, which has had to sell bonds as tech savers start withdrawing capital. In reality, NatWest will hold the majority of these bonds to maturity as they will not need to sell them.

European banks are safer than ever. Bad debt levels have fallen over the past decade and these institutions have more liquidity than ever before.

For example, NatWest’s liquidity coverage ratio (LCR) is 145%, which represents £52bn of headroom above the minimum requirement of 100%. This makes it one of the safest large banks in Europe and the US. From the big banks, only UBS, Credit Agricole, UniCredit and Santander had LCRs above 150% in February.