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

NIM fears overdone ?

The third-quarter net interest margin miss should not be overinterpreted as confirmed by the group’s reiterated short and mid-term RoTE guidance.

Confirmed net interest margin pressure

The second quarter results were broadly in line with expectations thus enabling the management to marginally improve its guidance thanks to confirmed cost control and more resilient asset quality whereas the quarter showed that the net interest margin has peaked.

ESG excesses

Companies should not get involved in political matters. That is the lesson of Faragegate which could prove a salutary event.

UK Banks - Strong performance continues

Reiterated 2023 guidance

The first quarter results were boosted by fixed-income trading and benign asset quality trends. On the other hand, they confirmed that the interest rate tailwind is behind the UK banks. The management remains confident for 2023 while nobody expects it to forecast 2024.

14%-16% RoTE seen as sustainable

The negative post-release share price reaction sanctioned the lack of earnings surprise and a limited profit warning on 2024 consensus earnings expectations reflecting the management’s view that the liability side could reprice faster than expected.

No pain crisis ?

The management logically upgraded its guidance for 2022 on stronger interest rate hikes. The company reiterated its financial objectives for 2023 despite the looming crisis as it considers, like others, that this time banks will traverse the economic downturn unscathed.

Indecent RoTE objective

The group enjoyed a perfect quarter as rising interest rates inflated the net interest margin while not impacting asset quality trends. The management set aggressive financial objectives for 2023, showing strong confidence in ongoing profitability gains but which could prove indecent for a state-owned bank.

Supportive operating conditions

The first-quarter performance was boosted by market volatility and interest rate increases whereas the group continued to enjoy net provision recoveries. While this performance is not sustainable, it supports the management’s financial objectives for 2022 and 2023.

Ongoing restructuring to secure recovered profitability

The fourth-quarter results saw further litigation and restructuring charges opportunistically financed with loan provision recoveries. If the next two years are depressed by Ireland’s exit cost, the underlying profitability is expected to meet a decent, albeit not fully sustainable, 11% RoTE, as it will continue to enjoy some loan provision recoveries.

Slightly disappointing top line, ongoing provision recoveries

The bottom-line exceeded expectations on extra loan provision recoveries but slightly disappointed at the top-line level when adjusted for non-recurring items. The group continued to accumulate unproductive excess capital. In spite of management’s commitment, the latter will be returned to shareholders only very progressively.

Reiterated profitability guidance and increased capital distribution plan

The quarter enjoyed accelerated provision releases. The improved visibility on the group’s mid-term perspectives enabled management to increase its capital distribution plan over the next three years.