Analyst Note| Niklas Kammer, CFA |
Our fair value estimate for NatWest Group remains GBX 230 per share after the U.K. bank reported a good first quarter helped by loan-loss impairment releases. Compared with the last quarter of 2020, NatWest showed 5% growth in income driven by higher noninterest income more than offsetting marginally weaker net interest income. Net interest margins were almost flat, as a slight improvement in mortgage margins nearly offset the structural hedge headwind. We think more important to NatWest’s story, however, is the good performance in operating expenses. The group achieved a reduction of slightly above 4% in its cost base relative to the first quarter of last year, showing further progress of its restructuring plan. Loan-loss impairments were a credit to the income statement, worth GBP 102 million this quarter, as the group released provisions in the commercial banking segment no longer believed to be at imminent risk of default. To sum up, this performance resulted in a flattering 8% return on tangible equity, which does not reflect NatWest’s current true underlying profitability, but we believe the group is moving in the right direction. At its current valuation, we still see roughly 17% upside in NatWest shares and expect this gap will close as the group continues executing its strategy.