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NatWest (LSE:NWG) shares are up 198% over two years and 63% over 12 months. This is quite incredible, but we’ve seen some similar movements from other UK banks over the past three years as investors went from worrying about impairment charges to buoyant confidence in rising interest rates and improving economic conditions.
The shift reflects a broader reassessment of bank profitability, with net interest margins remaining strong and bad debt provisions proving less severe than feared.
This growth’s carried through to the past few months. The stock’s up 24.6% over the period. Thus, £10,000 invested then would be worth £12,460 today. Sadly, no dividends would have been received during the period. However, it’s still one impressive return for just a few months.
Nearing fair value
NatWest trades on a forward price-to-earnings (P/E) of 10.4 times for 2025 and 9.3 times for 2026. This is essentially double the figures we were looking at during the Silicon Valley Bank fiasco of 2023 — not that NatWest was ever materially impacted by the fiasco.
Normalised earnings per share is forecast at 63.5p in 2025 and 71p in 2026, implying growth of 16.6% in 2025 and 11.8% in 2026. That’s still very strong and in most cases would more than justify the P/E ratio.
However, we know that banks are cyclical and these growth figures shouldn’t be maintained through the long run. Periods of strong profitability are typically followed by more subdued phases as economic conditions, credit demand and interest rate environments evolve.
Looking forward, the dividend yield sits at 4.8%, rising to 5.3% based on forecasts. This is supported by strong dividend coverage — just over two times.
Compared to the FTSE 100 average, NatWest offers an attractive combination of yield, growth, and strong capital metrics. However, we need to compare apples with apples.
Blue-chip banks are roughly trading in line with each other, and they’re all doing well. To push higher still, I believe the banks need to demonstrate even greater levels of profitability, above current expectations.
I don’t believe there’s much cause for a re-rating. This refers to a change in the valuation multiple the market’s willing to pay for a company’s earnings or assets, rather than growth in the earnings themselves.
In the case of banks, re-ratings are relatively rare and usually short-lived. Valuations tend to be anchored by cyclical earnings, regulatory constraints and the risk of credit losses.
The bottom line
Momentum’s important and it can certainly carry a stock higher. That could continue to happen here. However, I believe the current earnings outlook is nearly priced in.
That doesn’t mean it’s not a good stock to look at for the long run. In my view, it’s still worth considering. But the fast-paced growth of the past few years may soon be over.
