FTSE 100 firm NatWest Group (LSE:NWG) released its 2021 full-year results on Friday (18 February). They were a mixed bag of figures, with the NatWest share price closing down on the day. I don’t own this Footsie share at present, but would I buy at current price levels?
NatWest returns to profit in 2021
Last year, the bank made a net profit of £2.95bn. This was a great improvement on the £753m loss the former Royal Bank of Scotland (RBS) made in 2020. However, this performance was boosted by almost £1.3bn of loan-loss reserves being written back into its bottom line. In the final quarter of 2021, NatWest’s net profit hit £434m, versus a £109m loss in Q4/2020.
Though it benefited from increased activity in the booming UK property market, it took three big hits to earnings. First, costs spiralled from the firm’s decision to withdraw from Ulster Bank in the Republic of Ireland. It lost €300m (£250m) from this ongoing disposal in 2021 and could lose another €600m (£500m) in related costs by end-2024.
Second, NatWest Markets — the bank’s trading division — made a hefty loss in 2021. Often a thorn in its parent’s side, the operation recorded an operating loss of £302m in the fourth quarter and a full-year loss of £711m. This was a substantially worse outcome than the £227m this subsidiary lost in 2020. Third, NatWest was fined almost £265m in December, after being convicted of anti-money-laundering failures. Yikes.
A cheap FTSE 100 share?
After these results — described as ‘messy’ by one City analyst — NatWest shares lost 5.8p (-2.4%) to close at 234.5p on Friday. This values the group at £26.4bn. This fall came despite news of a final dividend of 7.5p per share — plus a share buyback of £750m from NatWest in the first half of 2022.
One overhang for this stock is that NatWest is still majority-owned by HM Government (HMG). This followed a huge bailout of RBS during the banking crisis of 2008. Currently, the taxpayer owns just over half (51%) of the bank. Of £3.8bn of capital distributed to shareholders last year, £1.7bn went to HMG.
On the plus side, the bank’s Common Equity Tier 1 (CET1) ratio of 15.9% reflects a strong balance sheet. This still leaves the group with perhaps £3bn of excess capital for future distribution.
NatWest shares have risen by 10.2% over six months and leapt by 28.4% over the past 12 months. However, they are down 1.6% over the past five years. Right now, this share trades on a price-to-earnings ratio of 11.6 and an earnings yield of 8.6%. The dividend yield of 2.6% a year is below the FTSE 100’s 4% cash yield.
Although these fundamentals look undemanding to me, I believe I can find better value elsewhere in the FTSE 100. What’s more, with HMG pencilling in more share sales in 2022-23, this could act as a brake on future share-price gains. Right now, I prefer Lloyds Banking Group shares to NatWest today (for Lloyds’ superior earnings yield). In summary, though NatWest looks in decent shape to me today, I won’t buy its shares. Instead, I’ll seek out better value elsewhere in the FTSE 100.
