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Down 6% in a day! What’s going on with the NatWest share price?

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Sometimes it’s difficult to explain daily stock price movements. Yesterday, the NatWest Group (LSE:NWG) share price fell 6%, despite the bank releasing some impressive results for 2022.

Total income was up 26% on 2021, and profit before tax was 34% higher.

The net interest margin (NIM), which measures the difference between the interest earned on loans and that paid on deposits, increased from 2.27% to 2.74%.

And, perhaps most impressive of all, the return on capital employed (ROCE) soared from 9.4% in 2021, to 12.3% in 2022. To put this in perspective, Barclays fell from 13.1% to 10.4% over the same period.

Measure 2021 2022 Change (%)
Total income (£bn) 10.42 13.16 +26
Operating expenses and impairments (£bn) 6.58 8.03 +22
Profit before tax (£bn) 3.84 5.13 +34
Net interest margin (%) 2.27 2.74
Return on capital employed (%) 9.40 12.3

Loan book

Even in these difficult times, the chief executive reported that she wasn’t seeing any “significant signs” of financial distress among the bank’s customers. Indeed, it increased its provision for bad loans less in the fourth quarter of 2022 than it did in the third.

Although, looking over a longer period, it’s clear that more customers are struggling than previously. In 2021, the bank reduced its estimate of impaired loans by £1.17bn, helping to boost its profit. This year, NatWest has recorded a charge (cost) in its accounts of £0.34bn.

Impairment (£m) Q1 2021 Q2 2021 Q3 2021 Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022
(Charge)/Credit 86 597 221 269 36 18 (247) (144)

However, to demonstrate their confidence in the business, the directors announced a significant increase in the dividend, from 10.5p to 13.5p per share. This gives a current yield above the FTSE 100 average. A £800m share buyback programme was also unveiled.

Too good to be true

So, why did the bank’s share price fall?

In a perfect market, where there are numerous buyers and sellers in possession of lots of information, a company’s stock price should reflect its discounted expected future cash flows. This means investors are forward looking. They are conscious that even if last year’s results are good, it doesn’t necessarily mean this year’s will be.

And that probably explains why the bank’s share price underwhelmed yesterday.

According to reports, NatWest’s expectations for its financial performance in 2023 are lower than analysts were predicting. The bank expects net income of £14.8bn, a NIM of 3.20%, and a ROCE of 14%-16% this year. However, City insiders were estimating £15.0bn, 3.38%, and 15.8%.

What do I think?

The reaction to NatWest’s results reinforces my belief that investing should be for the long term.

This year, even if the bank doesn’t perform as well as analysts expect, it should still do well. Income and earnings are rising, and the bad debt risk associated with its loan book appears to be under control.

On the back of a 28% increase in its dividend, the bank also intends to return 40% of its attributable profit to shareholders for the foreseeable future.

By any reasonable measure, the bank should do better in 2023 than it did in 2022. For that reason, if I didn’t already have exposure to the UK banking sector through my shareholding in Lloyds Banking Group, I’d probably be looking to buy shares in NatWest.

The post Down 6% in a day! What’s going on with the NatWest share price? appeared first on The Motley Fool UK.

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James Beard has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.