Company Reports

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%.

No-moat NatWest comfortably passed the Bank of England’s stress test. At its lowest point, NatWest’s common equity Tier 1 ratio dropped to 10.3% from a starting point of 17.5% at the end of 2020, on a fully loaded basis. This was comfortably above the minimum of 7.0% regulators believe NatWest should hold in capital reserves. The stress test aims for a plausible and severe macroeconomic scenario, which is significantly more punitive than what the U.K. economy experienced during 2020. While allowing for a great performance in this stress test, the high starting point and well-above-requirements common equity Tier 1 ratio at its low point highlights the overcapilization of NatWest. The bank is addressing its capital levels through shareholder distributions, primarily. Overall, the bank more than adequately capitalized, will retain functional without capital infusions in such a severe macroeconomic scenario, and does not rely on transitional accounting arrangements to smooth capital drawdowns throughout the stress. We maintain our GBX 230 per share fair value estimate.

No-moat NatWest Group reported third-quarter operating profit before tax of GBP 1.07 billion, comfortably ahead of consensus estimates collected by NatWest itself of GBP 0.68 billion. However, this beat was partially driven by one-offs in noninterest income. Loan-loss reversals of GBP 242 million versus an expected loss of GBP 40 million by analysts collectively also helped. We plan to update our model shortly but don’t expect a material change to our GBX 230 per-share fair value estimate. Our no moat rating is unchanged.

No-moat NatWest Group reported second-quarter operating profits before impairments of GBP 954 million, up 13% versus the first quarter this year. It achieved this healthy performance on good cost development while income generation was flat overall. We maintain our fair value estimate of GBX 230 per share.

The Prudential Regulation Authority, or PRA, in the United Kingdom has removed all capital distribution restrictions on large U.K. banks. We think the move was well-anticipated by the market and should have a minimal impact on share prices of the U.K. banks we cover. However, it does support our view that Barclays, Lloyds, and NatWest are adequately capitalized. We expect all three banks to give an update on their capital distribution plans during the upcoming second-quarter earnings releases. We estimate the banks have approximately 6% (Barclays), 13% (Lloyds), and 29% (NatWest) of their current market capitalization in excess capital available for distribution.