Stock market

NatWest shares are the best performers in the FTSE 100! Should I invest?

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Natwest Group (LSE:NWG) has been FTSE 100The most prolific actor of late, his shares have risen 54 percent over the past three months. Yet on paper the banking giant still offers excellent all-round value, in my opinion.

At 322.6p per share, the shares trade on a forward price-to-earnings (P/E) ratio of 7.9 times. This is comfortably 10.5 times the footsie average.

On top of that, investors can earn a healthy 5.2% yield with its shares right now. In comparison, the broader index returns to an average of 3.5%.

The high street bank could be in line for further significant gains as market confidence improves. But there are also plenty of risks that could see it fall back to Earth. what shall I do?

Why is NatWest growing?

Like many other FTSE 100 shares, NatWest’s share price has risen as investors’ appetite for value has increased.

There has been talk of UK shares being undervalued for a long time. Many analysts in the City believe that the market is now coming to terms with this idea and the London stock market is rallying massively.

Demand for NatWest shares has been particularly strong this year due to forecasts of full-year and first-quarter results. The latest financials at the end of April showed total revenue for the March quarter of £3.5bn, above forecasts of £3.4bn.

Pre-tax profit of £1.3bn was in line with expectations. But bad loans of £93m were being offered by almost half the level of brokers.

On top of that, NatWest’s net interest margin (NIM) came in at 2.05% for the first quarter, beating forecasts of 1.98%. This key metric measures the difference between the interest on loans that banks generate and the interest they pay to depositors.

The elephant in the room

However, I know that these specific numbers are small pieces of good news. The big story is that profits across all UK banks are falling sharply: NatWest’s own operating pre-tax profit fell 27% year-on-year in the first quarter.

Incomes are falling due to the first rate hike provided by the Bank of England. Higher rates are key to banks’ NIMs, and margins continue to shrink, with cuts likely for the summer.

At the same time, the outlook for cyclical high street lenders remains largely bleak as the UK economy struggles for traction. The latest unemployment data out today (May 14) showed that unemployment rose to 4.3 percent in the first quarter.

Major forecasters are expecting the trading environment to remain tight, which bodes poorly for such cyclical shares. Both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) have cut their UK GDP forecasts in recent weeks, with the latter now a modest 0.4% in 2024. Growth is predicted.

The bank is already struggling to grow loans and manage shrinking margins as competition intensifies. With the UK economy facing significant structural issues, profit growth may remain weak despite its strong brand strength.

Here is what I will do now.

I believe NatWest’s rising share price fails to reflect its serious outlook for 2024 and beyond. And the risks of its reversing action are high, especially as the government (which owns about 28 percent of the bank) continues to sell shares.

For these reasons, I want to look for other UK value stocks to buy now.


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