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FTSE Banks: NatWest May See Upside As Financials Continues To Outperform

Published 02/07/2021, 15:18

US financial stocks, including banking shares, have seen solid returns in the first half of 2021.

So far this year, both the Dow Jones Banks Index and Dow Jones Financials Index and are up about 28.5% and 21.5%, respectively.

On the other side of the Atlantic, UK banks also have had a strong 2021. Therefore, today we look at FTSE 100 member NatWest Group (LON:NWG) (NYSE:NWG).

NatWest Group Weekly Chart.

NatWest is one of the largest banks by market cap on the UKs main index. Others include Lloyds Banking Group (LON:LLOY) (NYSE:LYG), HSBC (LON:HSBA) (NYSE:HSBC), Barclays (LON:BARC) (NYSE:BCS) and Standard Chartered (LON:STAN) (OTC:SCBFF).

Here's how shares of these five banks have so far fared in 2021:

  • NWG: up 21.2%;
  • LLOY: up 28.4%;
  • HSBC: up 11.2%;
  • BARC: up 17%;
  • STAN: up 0.5% (i.e, flat).

On July 1, NWG stock closed at 206.9p ($5.69 for US-based shares). The 52-week price range has been 90.54p-214.20p. The current price supports a dividend yield of 1.48%, and the market cap is £23.9 billion (or $32.9 billion).

NatWest Group’s Recent Earnings

Edinburgh-based NatWest Group is the largest commercial bank in the UK. Formerly known as Royal Bank of Scotland, the group's retail operations are also significant. The UK government still owns close to 55% of the bank, which was bailed out during the financial crisis of 2008/09.

In late April, the bank announced Q1 interim management statement. Total income was £2.66 billion, a decline of 16% year-on-year. Operating profit before tax was £946 million and profit attributable to shareholders amounted to £620 million. In Q1 2020, the respective numbers had been £519 million and £288 million, respectively.

Basic EPS also increased by 125% YOY. Analysts were overall pleased with the metrics, strength of the balance sheet and earnings jump. Investors have been wondering if the fundamentals could also mean the potential for higher dividends in the months ahead.

On the results, CEO Alison Rose commented:

"Defaults remain low as a result of the UK government support schemes, and there are reasons for optimism with the vaccine programs progressing at pace and restrictions being eased. However, there is continuing uncertainty for our economy and for many of our customers as a result of COVID-19.”

Following the release of Q1 earnings, NWG stock initially declined about 4% toward 190p. But since then, the shares have been strong, buoyed by the general optimism regarding the UK economy.

Bottom Line

FTSE 100 banks have been on a roll in 2021. Overall, they have been growing income and keeping their expenses in check. As the UK eases its lockdown, investors have been positive on the outlook for the sector.

Yet, given how far banking shares have risen in the past six months, short-term profit-taking could also be around the corner. In other words, much of the good news might already be priced in for the summer months. Potential investors in NWG shares would find better value around 195p or even below.

In the long-run, we believe NWG shares could increase further in the coming quarters. The stocks forward P/E and P/S ratios stand at 9.83 and 2.44. Its price-to-book value of just 0.57 is also low, potentially appealing to buy-and-hold investors. Before the end of the year, NWG stock could make an attempt toward the 225p level seen prior to the start of COVID-19 in early 2020.

On a final note, those who do not want to commit full capital into NatWest stock but are interested in financial shares could investing in an exchange-traded fund (ETF). Examples would include:

Invesco KBW High Dividend Yield Financial ETF (NASDAQ:KBWD): up 25.2% YTD;

iShares Global Financials ETF (NYSE:IXG): up 19.5% YTD;

SPDR® S&P Bank ETF (NYSE:KBE): up 23.9% YTD.

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