Can Natwest shares keep going up after their 262% rise?

The past five years have been rewarding for shareholders in FTSE 100 bank Natwest Group (LSE: NWG). Very rewarding. During that period, Natwest shares have moved up by 262% in price.

On top of that, the shares yield 3.9% even now â well above the FTSE 100 average.

But someone who invested five years ago, at the lower share price back then, would now be earning a yield close to 14%. For a blue-chip banking share that is an exceptional yield.

Could the share keep moving up â and might it make sense for me to add it to my portfolio?

Overpriced or not?

It may sound surprising given that Natwest shares have comfortably more than tripled in value over the past five years, but I do not think the current price is necessarily too high to justify.

The price-to-earnings ratio, for example, is close to 10. That is fairly low to me and markedly lower than the FTSE 100 average.

Meanwhile, though, the price-to-book ratio looks less attractive to me. This is a commonly used valuation measure when it comes to assessing bank shares.

Currently, Natwest shares sell for above book value. That does not necessarily make the share overpriced, as in reality some soft assets like trusted brands and longstanding customer relationships may have more value to the business than can be fully captured on a balance sheet.

Still, the price-to-book ratio being above one (meaning the share price is higher than book assets per share) does suggest that the soaring price has reduced the attractiveness of its valuation now compared to a few years ago.

Potential for further gains

Given that, could the share price keep moving higher?

In some circumstances, I think it could do. Loan defaults remain manageable for now and the bank is massively profitable. It made Â£1.7bn in the most recent quarter alone.

Its UK focus, large customer base, and proven business model mean that it could keep pumping out earnings as long as the UK economy remains in relatively decent shape, I reckon.

The economy does not even need to do especially well, I think, as long as it stays healthy enough that loan defaults do not go up sharply.

In the most recent quarter, not only were impairment losses lower than in the previous quarter, they were sharply lower than in the same quarter the prior year. That suggests that, for now at least, loan defaults are not much of a thorn in Natwestâs side.

If things stay on an even keel, I reckon Natwest shares could potentially move up further even from here.

Hereâs why Iâm waiting

Despite that, though, I am not about to buy Natwest shares.

The business is performing well and earnings are high. But I continue to see a risk that a lacklustre UK economy could turn fairly fast into a weakening one. Currently, economic momentum feels weak.

In such a case, loan defaults could rise sharply. With Natwestâs UK focus, it would surely suffer in such a situation.

I do not feel the current share price offers me enough margin of safety to account for that possibility.

The post Can Natwest shares keep going up after their 262% rise? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.