Company Reports

NatWest reported a strong second quarter, ahead of company-compiled consensus estimates. Total income grew 5% to GBP 3,590 million compared with last quarter and good performances across the board. Standing out positively was an expanding net interest margin, which widened to 210 basis points from 205 basis points last quarter. We had expected a further decline in the margin between what the bank receives from borrowers and pays to its depositors. The lending margin did indeed decline by 2 basis points, but deposit margins expanded by 6 basis points. This was helped by solid deposit growth of about 1% and an improving deposit mix shift dynamic. The structural hedge income locked in on July 27 until 2026 already marginally exceeds 2023 hedge income with the optionality for more. Loan losses also stood out positively, as was expected after an already good quarter posted by Lloyds driven by improving economic scenarios. NatWest booked a GBP 45 million loan-loss reversal after updating its economic outlook and releasing GBP 117 million in management overlays. Guidance was improved to about GBP 14 billion in total income (GBP 13 billion-GBP 13.5 billion previously) and loan losses below 15 basis points (below 20 basis points previously). The new guidance is aligned with our forecasts and as such we aren't changing our GBX 360 per-share fair value estimate. Our no moat rating is unchanged.

After taking a fresh look at our model for NatWest, we increase our fair value estimate to GBX 360 per share from GBX 280 previously. The largest change in our assumptions has been our modelling of NatWest's net interest margin. While we previously assumed that NIM may have peaked in 2023 with a subsequent slow decline, we now believe that the structural hedge income at current swap rates will be able to more than offset potential headwinds on margins. The first quarter this year already displayed a material slowing of headwinds weighing on NIMs, a trend we foresee to continue over the coming quarters. We do, however, expect lower base rates set by the Bank of England to weigh on deposit margins in the second half of 2024 through 2025. As a result, we now model for a banking NIM of 300 basis points by 2027 after a trough of 285 basis points in 2025. Moreover, NatWest can comfortably maintain a 40% dividend payout ratio while also returning GBP 3.3 billion in share buybacks over the next three years while maintaining its common equity Tier 1 ratio within its target range between 13% and 14%. Our no economic moat rating is unchanged.

Once the biggest bank in the world, NatWest Group is now a much smaller and mostly U.K.-focused bank with a good retail and commercial banking franchise. The bank also stands on a more solid footing than it has ever had during the last decade. The largest litigation and conduct issues—such as the residential mortgage-backed securities case in the U.S. and the redress for mis-sold payment protection insurance, which had been significant headwinds to performance over the recent past—have come to a close.

Natwest purchased Sainsbury's' retail banking assets and liabilities in a deal that follows a similar transaction between Barclays and Tesco in February this year. The deal is small relative to Natwest's total balance sheet, but it does help the bank increase its exposure in credit cards (GBP 1.1 billion, up 19%) and unsecured personal loans (GBP 1.4 billion, up 15%) where it is lagging peers Barclays and Lloyds. Natwest will receive GBP 125 million at the completion of the deal targeted for the first quarter of 2025. Similar to Tesco, Sainsbury has opted to retain its commission fee businesses including insurance, travel money and ATMs as these businesses are typically less capital intensive.

NatWest reported first-quarter profits before tax of GBP 1.33 billion, 5% ahead of consensus estimates collected by the bank before the release. Performance in the quarter was good, with net interest margins stable across business units. Deposits have stabilized as retail and private banking deposits' growth of GBP 2.1 billion more than offset commercial and institutional outflows of GBP 1.2 billion. The mix between non-interest-bearing and interest-bearing deposits still showed a marginally unfavorable development toward the latter, but migration is slowing. A loan loss rate of 10 basis points in the quarter also stood out positively, reflecting a still-benign level of defaults despite higher interest rates weakening interest coverage ratios for corporates and households. Operating expenses were 3% ahead of the same period a year ago, driven by the Bank of England levies and inflation driving up staff costs. Excluding the higher levies, NatWest retained its 2024 cost guidance to align with 2023 levels.

NatWest reported fourth-quarter 2023 results largely in line with our expectations, closing an overall strong year for the bank. Income generation, excluding notable items, declined 2% on a sequential basis to GBP 3.442 billion on lower noninterest income. Net interest income was virtually flat as higher interest-earning assets nearly fully offset a 6-basis-point lower net interest margin at the group level. The declining deposit margin is the main culprit driving NIMs lower as depositors shift from noninterest-paying accounts into higher-rate savings accounts. Positively, the shift appeared to slow in the fourth quarter, which overall is a positive sign for NIM development in future. That said, with the base rate likely to be reduced as early as this summer, NIMs are set to be compressed in future. Loan-loss provisions of GBP 126 million were positive and better than we had expected. We maintain our GBX 280 per-share fair value estimate and no moat rating for NatWest.

We reduce our fair value estimate for NatWest to GBX 280 per share from GBX 300 per share previously. The largest change after refreshing our model has been adjustments to our net interest margin, or NIM, assumptions. The Bank of England is likely to start cutting the base rate in 2024, which should lower deposit funding spreads. At the same time, however, we don't expect a material reprieve from the current interest rate passthrough U.K. banks are experiencing due to the higher level of interest rates. The structural hedge will continue to form a tailwind for the net interest margin, but in sum we anticipate the net interest margin to retract from about 305 basis points in 2023 to about 285 basis points in 2025.

Once the biggest bank in the world, NatWest Group is now a much smaller, mostly U.K.-focused bank with a good retail and commercial banking franchise. The bank also stands on a more solid footing than it has ever had during the last decade. The largest litigation and conduct issues—such as the residential mortgage-backed securities case in the U.S. and the redress for mis-sold payment protection insurance, which had been significant headwinds to performance over the recent past—have come to a close.

No-moat NatWest reported an overall good first quarter. Return on tangible equity of 19.8% can hardly be seen in a different light. Yet, flat net interest income quarter over quarter and uncertainty around deposit volumes and increasing pass-through rates while base rates are likely to continue to increase for the remainder of the year dampened enthusiasm on NatWest’s outlook. We maintain our fair value estimate of GBX 300 per share.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We do not believe investors should view the collapse of U.S.-based Silicon Valley Bank as a read-through of the health of European banks' balance sheets. Nevertheless, banks remain highly reliant on the confidence of depositors and other funders. It would be foolish to say there is no contagion risk for European banks, especially if other global banks run into trouble. The current uncertainty could also push up the cost of funding and increase the rate at which European banks pass on higher interest rates to depositors. But we believe it is vital for investors to take note of the contrasts between European banks' and SVB's balance sheets.

No-moat NatWest reported good fourth-quarter results, but guidance on further upside from net interest income in 2023 did disappoint. We maintain our GBX 300 per-share fair value estimate.

No-moat NatWest reported third-quarter operating profit before tax of GBP 1,242 million versus consensus estimates of GBP 1,403 million. Although income generation was roughly in line with expectations, higher operating expenses, and litigation and conduct costs as well as higher impairment losses came as a surprise. That said, higher base interest rates are a stronger tailwind to NatWest’s underlying business than any concerns over headwinds from the slowing economy. We maintain our fair value estimate of GBX 300 per share.

Once the biggest bank in the world, NatWest Group is now a much smaller, mostly U.K.-focused bank with a good retail and commercial banking franchise. The bank also stands on a more solid footing than it has ever had during the last decade. The largest litigation and conduct issues—such as the residential mortgage-backed securities case in the U.S. and the redress for mis-sold payment protection insurance, which had been significant headwinds to performance over the recent past—have come to a close.

Once the biggest bank in the world, NatWest Group is now a much smaller, mostly U.K.-focused bank with a good retail and commercial banking franchise. The bank also stands on a more solid footing than it has ever had during the last decade. The largest litigation and conduct issues—such as the residential mortgage-backed securities case in the U.S. and the redress for mis-sold payment protection insurance, which had been significant headwinds to performance over the recent past—have come to a close.

We raise our fair value estimate for NatWest Group to GBX 300 per share from GBX 230 previously. The primary driver of our fair value adjustment stems from materially higher net interest margin assumptions on the back of the rapid rate hike cycle by the Bank of England. We now anticipate the banking net interest margin to grow to 2.8% in 2022 versus just 2.4% last year, before hitting about 3% by 2025. We have also lowered our mid-cycle loan loss assumption down to 40 basis points from 45 basis points, which however still sits well above the 20 to 30 basis points management believes the bank will book on a through-the-cycle basis. Our no moat rating is unchanged.

Once the biggest bank in the world, NatWest Group is now a much smaller, mostly U.K.-focused bank with a good retail and commercial banking franchise. The bank also stands on a more solid footing than it has ever had during the last decade. The largest litigation and conduct issues—such as the residential mortgage-backed securities case in the U.S. and the redress for mis-sold payment protection insurance, which had been significant headwinds to performance over the recent past—have come to a close.

NatWest reported first-quarter operating profits before tax of GBP 1,287 million, comfortably ahead of the GBP 976 million consensus figure collected by the group itself. Trading income performed better than expected and a small loan-loss reversal of GBP 7 million was also ahead of expectations for the quarter. We maintain our fair value estimate of GBX 230 per share.

For fourth-quarter 2021, no-moat NatWest reported profit before loan-loss impairments of GBP 294 million versus the GBP 472 million consensus estimate collected by the group itself prior to the release. The miss was almost entirely driven by higher-than-anticipated litigation and conduct costs, which can be lumpy and distort results. Cleaned of this, performance was good. NatWest has taken further steps in 2021 by improving its underlying business, increasing profitability, shedding low-return profile assets, and lowering its cost base. In tandem with the brightening outlook for the U.K. economy and raising rates blowing wind into NatWest’s sails, we expect the progress in profitability to continue through this and next year. We plan to update our model shortly with full-year 2021 figures and anticipate that our more bullish outlook on NatWest’s fundamentals will result in a fair value estimate increase beyond 10%.