Company Reports

NatWest reported second-quarter operating profit of GBP 2.3 billion, up 12% sequentially on net interest income outpacing expenses.

NatWest operates a strong retail and commercial banking franchise in the UK. Although the UK market is competitive, we think that NatWest's large deposit share and access to low- or non-interest-bearing funding sources will allow the bank to derive healthy returns.

NatWest reported operating profits of GBP 2 billion, 12% ahead of the same quarter a year ago, despite taking higher provisions. Total income guidance is now expected to reach the top of the range for 2026.

We raise our fair value estimate for NatWest Group after incorporating good fourth-quarter results and lifting our midcycle profitability assumptions.

NatWest operates a strong retail and commercial banking franchise in the UK. Although the UK market is competitive, we think that NatWest's large deposit share and access to low or non-interest-bearing funding sources allow the bank to derive healthy returns.

NatWest reported a good third quarter with operating profits growing 23%. For 2025, the bank now expects income excluding notable items at around GBP 16.3 billion (above GBP 16 billion before) and a return on tangible equity above 18% versus 16.5% previously.

NatWest operates a strong retail and commercial banking franchise in the UK. Although the UK market is competitive, we think that NatWest's large deposit share and access to low or non-interest-bearing funding sources allow the bank to derive healthy returns.

NatWest Group reported second-quarter operating profits of GBP 1,773 million, 8% ahead of consensus estimates collected by the bank. Income generation was good as the structural hedge continued to support net interest income, while operating expenses growth was in line with guidance.

We revised our assumptions for NatWest and raise our fair value estimate to GBX 480. Primarily, our fair value increase rests on a significantly better net interest margin performance and continuously improving net interest income outlook. We had previously assumed that weakening deposit margins brought about by multiple base-rate cuts would more than negate the positive structural hedge effect. However, the opposite has been the case. Base-rate cuts have been less frequent than anticipated, and swap rates have held relatively stable. As a result, NatWest's loan portfolio has been rolling on to higher rates. Based on current swap rates, this effect should continue into 2027. As a result, we now assume net interest margins to expand to 240 basis points in 2027 from 213 basis points in 2024. Our no moat rating is unchanged.

Once the biggest bank in the world, NatWest Group is now a much smaller and mostly UK-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 US 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 a good third quarter, lifting its 2024 income guidance to about GBP 14.4 billion from GBP 14 billion previously. NatWest exceeded consensus expectations collected by the bank prior to the release on net interest income and noninterest income. We maintain our GBX 360 per share fair value estimate and no moat rating.

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.