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FTSE 100 ‘Big Four’ bank NatWest (LSE: NWG) released another strong set of results on 2 May.
Profit soared 35.9% year on year to £1.341bn, while total income jumped 14.5% to £3.98bn. Over the same period, operating expenses fell by 3.6% to £1.979bn.
A risk in the shares could come from further decreases in UK interest rates as these could squeeze its net interest income (NII). This is the difference in money made from the interest on deposits and loans.
However, its Q1 results showed that NatWest’s NII increased over the period by 14.1% to £3.026bn. This mainly resulted from an increase in the interest rate charged on loans.
It also reflected a 0.9% year-on-year increase – by £3.4bn, to £371.9bn — in new loans extended via mortgages and to corporate and institutional clients.
Non-interest income also increased 15.8% to £954m.
For full-year 2025 the bank forecasts income at the higher end of the £15.2bn-£15.7bn range. In 2024 it was £14.6bn.
Do the shares look cheap?
My starting point in assessing NatWest’s share price is to compare its key stock valuations with those of its competitors.
On the price-to-earnings ratio it trades at 8.2 against its peer group’s average of 9.8. These banks comprise Barclays at 7.9, Standard Chartered at 9.7, HSBC at 10.3, and Lloyds at 11.3.
So NatWest looks very undervalued on this basis.
However, it looks slightly overvalued on its 0.9 price-to-book ratio compared to its competitors’ average of 0.8. And the same is true of its 2.7 price-to-sales ratio against its peers’ average of 2.4.
To cut to the chase of this valuation, I used the second part of my standard share assessment. This seeks to pinpoint where any firm’s stock price should be, based on future cash flow forecasts for the business.
The resultant discounted cash flow analysis for NatWest shows it is 55% undervalued at its current £5.05 price.
Therefore, its fair value is £11.22, although market vagaries could push it lower or higher.
The dividend yield bonus
NatWest also delivers a 4.3% dividend yield at present, although this is forecast to rise dramatically.
Specifically, analysts project that the bank will pay dividends of 29.1p this year, 30.9p next year, and 34.8p in 2027.
These would give respective yields on the current share price of 5.8%, 6.1%, and 6.9%. By contrast the current average yield of the FTSE 100 is just 3.6%.
To put this into context, a £10,000 investment yielding 6.9% would generate £9,898 in dividends after 10 years. And on the same average rate, this would rise to £68,780 after 30 years.
It is important to note here that this also assumes the dividends are reinvested back into the stock – known as ‘dividend compounding’.
Will I buy more of the shares?
NatWest’s recovery from the dark days of its government bailout during the 2007/08 financial crisis has been extraordinary.
The UK government appears so confident in its future that Chancellor Rachel Reeves confirmed it will fully relinquish its holding by 2026.
It also looks to be prospering in the lower interest rate environment seen in recent months in the UK.
Consequently, now looks like a good time for me to buy more of the stock, which I will be doing very soon.
