The NatWest share price has changed little since 2008. The company’s book value was £37.2bn at the end of last year, which is £3.76 a share, but some of this is goodwill. Tangible book value a share is around £3, leaving the shares trading at 92 per cent of book.
This is on the high side of valuations for UK banks since the 2008 financial crisis. The return on equity for the group last year was 12.2 per cent, which is quite healthy but unlikely to rise much further without the bank taking on greater lending risk.
At this return on equity the bank can generate 36p of income a share, and if 40 per cent of that is paid out, that gives a dividend yield of 5 per cent (in good times).
At current prices, NatWest shares offer reasonable value for investors, who think the prospects for the UK economy are strong and that inflation will be kept under control – bank costs rise with inflation, but lending margins do not.
Over the past 15 years, I have invested a very small portion of the global equity funds I have managed in banks. I have owned the largest US banks, such as JPMorgan (as its regulator has been content to see the bank highly profitable), but I have focused my financials allocation on Japanese banks. These traded at very large discounts to book value and held the prospect of making much higher returns when interest rates rose above zero.
In the UK and Europe, I have taken the view that bank shareholders get rough treatment when there is a banking crisis and are then not allowed to enjoy great gains in the good times.
There are so many fine companies in which to invest, why bother with NatWest Bank?
Simon Edelsten managed global equity funds for 40 years
