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NatWestThe (LSE: NWG) share price was up around 5% at one point on Friday (February 16) with 2023 results much better than expected.
The bank made its biggest profits since the £10bn it made in 2007, just before the Great Financial Crisis (GFC) began.
The £6.2bn pre-tax profit was also 20% higher than in 2022 and beat consensus analyst forecasts of £6bn.
Positively for shareholders – of which I am one – it also announced a £300m share buyback. These tend to be positive for a stock's price.
The company also made Paul Thwaite's former interim role as CEO permanent. So should I buy more?
The Great Headwind Coming
As a long-term investor today, rather than the investment bank trader I was, I'm not worried about buying rising stocks.
My only concern is if the value holds up. A key part of determining this is looking at whether a company appears poised for further growth.
In the case of NatWest, I think the answer is yes, but probably not as much as we saw last year.
Like all major UK banks, it has benefited from a high net interest margin (NIM). This is the difference between the interest you receive on loans and the rate you pay on deposits. The strong NIM was a result of the high interest rates required to combat rising prices.
However, inflation has now fallen from its peak of 11% in 2022 to around 4%. Analyst expectations are that interest rates may also have peaked. This will cause banks' NIMs to fall and, most likely, profits with them.
Strong core business
NatWest reduced its forecast for return on tangible equity (ROTE), a key measure of banks' profitability, from 14% to 16% for 2025/26. The goal for 2025 is now “about 12%” and “greater than 13%” by 2026.
It also expects total revenue in 2024 to fall to £13bn-£13.5bn, from £14.8bn this year.
However, in my opinion, these figures would leave a very healthy business.
Despite the current cost of living crisis, the bank only needed to set aside £126m for bad loans. This compares with analyst expectations of £242m.
It also increased its deposit base in the fourth quarter by 1.9%.
Undervalued compared to peers?
The stock has lost 22% from its 12-month high on March 3 of £2.96.
On the key price-earnings (P/E) measure, NatWest is trading at just 4.4 versus a peer group average of 6.2.
However, Chartered Standard at 10.8 skews the figure, with NatWest slightly higher than Barclays in 4.1 and Lloyd's in 4.3, while HSBC Holdings It is at 5.5
A discounted cash flow analysis shows that NatWest shares are undervalued by around 59% at their current price of £2.30. Therefore, a fair value would be around £5.61, although of course the stock may never reach that price.
A true high-yield stock
In my opinion, a true high yield stock is one that offers a return greater than 7%. NatWest, unique among the UK's big banks, fits this bill.
In 2023, the interim dividend was 5.5p and the final dividend was 11.5p.
The 17p total for 2023 gives a 7.4% return on the current share price of £2.30.
In my opinion, this high dividend, strong core business and very undervalued stock means I will be buying more NatWest shares very soon.
