The keen decline in global markets over the past few days has caused panic among investors. Although this has mostly happened overseas in America, the impact of recession fears is being felt here in the UK. FTSE100 Stock prices are falling, but I feel some have fallen too quickly.

Reasons for the decline

One thing I noticed is NatWest Group (LSE:NWG). The banking group is down 13% in the past week. However, it is still up 35% over the past year.

Some point to the government’s announcement last week as a contributing factor to the short-term decline. It has to do with the government’s rejection of the idea that it will soon sell its remaining 19.97% stake in the bank. I don’t really see that as a bad thing. Whenever there is a share sale, it will be done in an arranged manner to avoid any major market impact.

The main reason for the decline is the fear that interest rates around the world will fall at a rapid pace to avoid major economies going into recession. Here in the UK we already got our first cut last Thursday (1st August) from the Bank of England.

A faster pace of cuts would be negative for NatWest because it would reduce the net interest income it generates. A lower base rate means it cannot achieve a huge margin between the rate at which it lends money and what it pays on deposits.

Why am I not worried

I think the fall in stocks is overstated. For starters, we have no clear signs that UK policymakers will be forced to cut interest rates anytime soon. That was not communicated at the Bank of England meeting last week. I think people are overreacting to some of the feeble US data.

In addition, market volatility can be beneficial for the bank. It has a global markets division that actively trades and invests. It also owns Coutts, a private bank that focuses on investments for high-net-worth individuals. Fees and commissions earned during this period of volatility could boost earnings in the current quarter.

Finally, the drop means the price-to-earnings ratio has fallen to 6.55. Compared to my fair value benchmark of 10, NatWest shares flash undervalued. If earnings per share remain at current levels, I would expect the share price to eventually return to a more realistic price.

We put it all together

If things really go downhill, there is a risk that people will default on loans and mortgages. That would be clearly negative for the banking group. But we don’t have enough information for that to happen.

In the coming days, I am very interested in buying the bank’s shares due to the current decline.