Image source: NatWest Group plc
A £10,000 investment in NatWest (LSE:NWG) shares made in August 2020 is now worth £45,296 – and that’s not all. In the last 12 months, it also returned £1,743 in dividends.
That’s far better than either the FTSE 100 or the S&P 500. And the outstanding performance is due to a specific combination of factors that investors might look for.
A rising tide
One big reason NatWest shares have done so well is a better trading environment for banks in general. This is largely the result of higher interest rates in the UK.
Between 2020 and 2024, interest rates in the UK went from 0.1% to 5.25% to combat inflation. And this resulted in better profitability for UK banks across the board.
NatWest’s net interest margin – the amount it makes on its plans – increased from 1.71% to 2.27%. That might not sound like much, but it’s a lot in the context of a £336bn loan book.
This however, doesn’t fully explain why the stock’s up 352%. Lloyds Banking Group and Barclays have also benefitted from higher rates, but their shares aren’t up as much.
Self-help measures
The other reason NatWest shares have fared so well since 2020 is improvements in the underlying business. Most notably, it’s repurchased the shares owned by the UK government. That’s reduced the overall share count by around 25%. And it’s also given the bank valuable independence from the government in terms of decision-making.
On top of this, NatWest’s shifted from looking to compete internationally to concentrating on its UK operations. This has also boosted the bank’s profitability metrics. In other words, the company’s share price has been driven by both a favourable trading environment and its own internal improvements. And this is a powerful combination.
Outlook
It’s likely to be much tougher for the NatWest share price to replicate its recent success going forward. Neither of the two main growth engines looks as effective. Interest rates in the UK have already begun falling and this looks set to continue. So I don’t think investors can expect the same continued margin expansion.
On top of this, the bank’s restructuring is largely complete. While the company will keep looking for ways to improve, a lot of the obvious moves have already been made.
That’s why NatWest isn’t on my Buy list. But I’m looking for companies that can benefit from both a better trading environment and their own internal improvements.
Where to look?
With interest rates falling, investors need to think about which sectors stand to benefit. And one that stands out to me is consumer discretionary, which has faltered recently.
Lower borrowing costs might be bad for lenders, but they’re good for borrowers. So if mortgages become cheaper consumers might find themselves with more money to spend.
The next job is working out which businesses also have scope for internal improvements. And I’ve got some ideas on that front as well.
