The last five years have been satisfactory for shareholders FTSE100 bank Natwest Group (LSE: NWG). Very satisfying. During this period, the Natwest share price increased by 262%.

What’s more, the stock is already yielding 3.9% – well above the FTSE 100 average.

However, someone who invested five years ago at the then lower share price would now be earning a rate of return close to 14%. For a blue-chip banking stock, that’s an exceptional rate of return.

Can the share price continue to rise and is it worth adding to your portfolio?

Overpriced or not?

This may sound surprising considering Natwest shares have more than tripled in the last five years, but I don’t think the current price is necessarily too high to justify it.

For example, the price to earnings ratio is close to 10. For me this is quite low and significantly lower than the FTSE 100 average.

Meanwhile, the price-to-book ratio seems less attractive to me. This is a commonly used valuation metric when valuing bank stocks.

Natwest shares are currently trading at above book value. This doesn’t necessarily mean an overvalued share price, because in fact some cushioned assets, such as trusted brands and long-term customer relationships, may be of greater value to a company than can be fully captured on the balance sheet.

However, the price-to-book ratio remaining above unity (meaning the share price is higher than the book value of assets per share) suggests that the rising price has made the current valuation less attractive compared to a few years ago.

Potential for further profits

Can the share price continue to rise as a result?

I think it could work under certain circumstances. For now, loan defaults are manageable and the bank is making huge profits. It earned £1.7 billion in the last quarter alone.

Its UK focus, enormous customer base and proven business model mean that I believe it can continue to generate profits as long as the UK economy remains in relatively decent shape.

I don’t think the economy even has to be doing particularly well, as long as it remains well enough that loan defaults don’t skyrocket.

In the last quarter, impairment losses were not only lower than in the previous quarter, but were much lower than in the same quarter last year. This suggests that, at least for now, loan defaults are not a major thorn in Natwest’s side.

If things continue to hold steady, I think Natwest shares could potentially go higher even from here.

This is why I’m waiting

Still, I have no intention of buying Natwest shares.

The business is doing well and profits are high. However, I still see a risk that the delicate UK economy could turn into a weakening one quite quickly. Currently, economic momentum appears delicate.

In such a case, loan defaults may escalate dramatically. By focusing on the UK, Natwest would certainly suffer in such a situation.

I don’t think the current share price gives me enough margin of safety to account for this possibility.