NatWest Group — Time for a re-rating?

Research: Financials

NatWest Group — Time for a re-rating?

Q423 earnings demonstrated the inherent profitability and resilience of returns at NatWest Group (NWG). PBT came in 25% ahead of consensus, with beats on both revenues and impairments along with good cost control. Despite continuing normalisation of credit and assuming around two more base rate cuts in 2024 than are currently priced into the bond market, management expects to deliver a return on tangible equity (RoTE) of c 12%. On consensus estimates, the shares trade at 0.8x tangible net asset value (TNAV) and P/E of 6.4x in 2024e. Without a re-rating, the consensus 10% TNAV growth and 6.4% yield imply a 16.4% 12-month total return.

Written by

Robert Murphy

Managing Director, Financials and Investment Trusts

Financials

NatWest Group

Time for a re-rating?

UK banks

QuickView

5 March 2024

Price

247p

Market cap

£21.6bn

Share price graph

Share details

Code

NWG.L

Listing

London Stock Exchange

Shares in issue

8,751m

Business description

NatWest Group is a UK-focused banking organisation, serving over 19 million customers, with business operations stretching across retail, commercial and private banking markets.

Bull

Net interest margins to bottom in H124 based on conservative interest rate assumptions.

Credit quality has been performing better than expected.

NWG shares are modestly valued at 0.8x 2024 TNAV for a RoTE of 12% with continuing strong dividends and share buybacks to continue.

Bear

The UK economy remains anaemic with high debt levels.

2024 earnings and returns to decline at NWG as margins and credit costs normalise.

The potential partial sale of the government’s 37% stake is an overhang on the shares.

Analysts

Rob Murphy

+44 (0)7900 484 805

Armando Hoxha

+44 (0) 203 0775 725

Q423 earnings demonstrated the inherent profitability and resilience of returns at NatWest Group (NWG). PBT came in 25% ahead of consensus, with beats on both revenues and impairments along with good cost control. Despite continuing normalisation of credit and assuming around two more base rate cuts in 2024 than are currently priced into the bond market, management expects to deliver a return on tangible equity (RoTE) of c 12%. On consensus estimates, the shares trade at 0.8x tangible net asset value (TNAV) and P/E of 6.4x in 2024e. Without a re-rating, the consensus 10% TNAV growth and 6.4% yield imply a 16.4% 12-month total return.

Resilient returns, conservative assumptions

The Q4 PBT beat was mostly driven by 48% better impairments, but underlying revenues were also 2% above consensus. RoTE was 17.8% with the common equity tier 1 ratio (CET1) finishing the year at a healthy 13.4% (including the £300m buyback announced with the results). Management has guided for a c 12% RoTE in FY24 with conservative interest rate assumptions and expects margins to bottom in H124 and improve in H2 and beyond as the structural hedge reprices. The hedge rolls off at 80bp in FY24 and 50bp in FY25, which should support the 2026 RoTE ambition of >13% on a CET1 ratio of 13.5%, at the mid-point of the target range.

Moderate risk profile

NWG has low unsecured consumer finance exposure, no exposure to the FCA motor finance review and coverage of stage 3 loans is more than double that of Lloyds Bank, its closest peer. The credit cycle is always an uncertainty for banks but these factors lower the potential risk around forecasts, in our view. A successful placing of part of the government’s 37% stake will reduce the stock overhang.

Consensus RoTE estimates in line

Consensus RoTE estimates are roughly in line with company projections in FY24/ 25 of 12.4% and 12.7%, which leaves scope for upside surprise should interest rates follow bond market expectations of three 25bp cuts rather than five in FY24.

Shares appear modestly valued

With expected low double-digit RoTEs over the next three years, a strong dividend, share buybacks and a FY24e TNAV of 321p, NWG shares appear modestly valued. Assuming no re-rating to TNAV, the shares would offer a theoretical 16.4% return (6.4% yield plus 10% TNAV growth) in the next 12 months.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

13,156

5,132

33.6

30.3

7.4

12.3

12/23

14,752

6,178

47.7

17.0

5.2

6.9

12/24e

13,666

4,841

37.0

15.7

6.7

6.4

12/25e

14,289

5,184

41.9

17.6

5.9

7.1

Source: Refinitiv

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

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London, WC1R 4PS

United Kingdom

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