The performance of the NatWest (LON: NWG) share price was extremely positive in 2021. It has gained over 40%, which is significantly higher than the FTSE 100 index’s (INDEXFTSE: UKX) rise of around 12% over the same period.
The Natwest share price may have been boosted by a changing macroeconomic picture. Inflation has surged to a ten-year high over recent months. In response, the Bank of England has increased interest rates from 0.1% to 0.25%. It has also hinted that it may continue to raise interest rates, since it now expects inflation to reach around 6% by April.
A higher interest rate is generally good news for banks such as NatWest. Although it can cause a slower rate of economic growth, as it means there is more incentive to save rather than spend, it also creates greater capacity for banks to make higher profits. Indeed, a higher interest rate means there is greater scope to increase net interest margins across the sector. This is essentially the difference between the rate of interest paid to savers and the interest rates charged to borrowers.
In addition, the firm delivered a relatively encouraging set of quarterly results. They showed a fall in operating expenses for the quarter and an increase in operating profit, from £355m in the third quarter of 2020 to £1,074m in the same quarter of 2021. Furthermore, NatWest continued with its share buyback programme and reported generally upbeat trading conditions in spite of an uncertain economic backdrop.
Looking ahead to 2022, the future for the banking sector seems uncertain. Risks include the impact of new Covid-19 variants and the effect of a higher rate of inflation that is expected to persist during the first half of the year. Rising interest rates could inhibit economic growth, which may reduce demand for products such as mortgages and loans. It may also prompt rising bad debt provisions among consumer and business loans.
However, NatWest’s current share price may factor in such risks. Despite its 40%+ rise since the start of the year it trades on a forward price-earnings ratio of around 11. This suggests that it could include a margin of safety in case the economic outlook becomes increasingly uncertain during the course of 2022.