The NatWest (LSE: NWG) share price is absolutely smashing it. It’s up 63% over 12 months, 120% over two years and a staggering 336% over five years.

With performances like that, I’d expect the valuation to be stretched. But its price-to-earnings ratio’s a modest 10.1. That’s well below the 15 times often seen as fair value and much lower than many growth stocks that haven’t come close to this kind of return.

FTSE 100 sector recovery

To be fair, NatWest isn’t the only FTSE 100 bank doing well right now. The Barclays share price is up 75% over one year and 244% over five. Lloyds Banking Group, which I hold, grew 47% and 187% over the same periods.

Banks are back in favour for one clear reason: they’re making money again. And in NatWest’s case, there’s a second big boost. The government has finally sold its last stake in the bank, 17 years after the £45bn taxpayer bailout of Royal Bank of Scotland.

It’s been a long road, and taxpayers were left nursing a £10.5bn loss. But private investors are now calling the shots, which should mean fewer political distractions.

Big banks are back!

The banking sector still isn’t squeaky clean. Since 2009, it’s been rocked by scandals from rate rigging to mistreatment of small business customers and, most recently, motor finance mis-selling. Investing in banks still means living with uncertainty.

And there’s another new variable. Chancellor Rachel Reeves is reviewing post-crisis banking regulation, including the ring-fencing regime that separates customer deposits from investment banking arms.

NatWest boss Paul Thwaite has urged Reeves to go further than recent tweaks, arguing the original rules have done their job. If she listens, banks could make even more money. Go too far and she may crank up risk across the sector.

On the other hand, Reeves’ decision to scrap the non-dom tax regime is ringing alarm bells at Coutts, NatWest’s high-end private bank. Thwaite isn’t the only one warning that higher earning customers may move abroad. A mooted banking windfall tax in the autumn Budget would take a bite out of future profits, but that’s pure speculation for now.

So while recent gains are impressive, I’d approach the numbers with a degree of caution. The air at these levels might be getting a little thin.

Profits surprise

Even so, NatWest delivered a strong performance in half-year results posted on 25 July. Operating profit rose 18% to £3.6bn, ahead of expectations. The bank also launched a new £750m share buyback and raised its dividend 58% to 9.5p a share.

Analysts still think the NatWest rally may have further to go. The consensus one-year share price forecast is 588.8p, up from 518p today. If correct, that’s a rise of 13.94%.

There’s income on offer too. While the current yield sits at 4.16%, it’s forecast to hit 5.61% this year. A total return of 19.55% over the next year would turn a £10,000 stake into £11,955. Not bad, if the forecasts prove right. They’re fun, but shouldn’t be taken too seriously.

My view? The NatWest share price can’t keep rising at this pace forever. But with decent growth prospects and an improving dividend, I still think it’s a stock worth considering for those who want to hold the bank for the long term.