NatWest shares could benefit from the unwinding of the government’s stake

NatWest reports first-quarter results on Friday. The bank has completed its rehabilitation since nearly collapsing during the economic crisis and being shored up by the taxpayer, returning to profit at the full-year results in February.

NatWest posted an attributable profit of £2.59bn for 2021 and delivered a return on tangible (shareholders’) equity of 9.4%, up from -2.4% last year. The liquidity coverage ratio of 172% - which demonstrates the bank’s ability to meet its short-term financial obligations - also increased by 6 percentage points in the quarter.

The government reduced its shareholder in the banking group in March this year to below 50% for the first time since the crisis – to 48.1%. This means it is no longer NatWest’s major shareholder and represents a solid step in the bank returning to the private sector.

Management successful trimmed £256m of costs during the period, although further cost reductions will be tempered by higher inflation, it says. Even the banks, it seems, can’t escape the cost of living crisis.

Customer deposits increased by £48.1 billion during 2021 to £479.8 billion. Meanwhile, net lending, excluding the government’s Covid support scheme, rose by £7.8bn driven primarily by the growth in mortgage lending.

Analysts’ consensus forecasts are of income of £2.7bn and operating profits before tax of £755m for the first-quarter.

Strong housing market

NatWest should continue to benefit from a buoyant UK housing market going forward, and it looks set to receive a boost from any further interest rate hikes by the Bank of England. Although, it’s also possible this could temper the market if this leads to an increase in customer defaults.

At the full-year results, the bank’s chief executive Alison Rose acknowledged the economic outlook was “uncertain”. However, she said that NatWest was on track to deliver a return on tangible equity of above 10% in 2023.

She also anticipates the bank ending this year with a CET1 ratio – another measure of the strength of NatWest’s balance sheet – of around 14% and targeting 13 to 14% by 2023. The bank is busy exiting the Republic of Ireland market and has a strong UK-focused business, particularly in digital banking.

NatWest’s generous dividend

NatWest has initiated a share buyback programme worth £750m in the first half of the year, taking the total to £3.8bn. It says it plans to return an additional £1bn each year, in both 2022 and 2023 in ordinary and special dividends, while also participating in buybacks of the government’s stake. The shares currently yield 4.8% but with the share buybacks this is closer to 13%.

Analysts at Bank of America recently increased their price target on the shares from 335p to 360p.

NatWest shares have recovered since dipping last January and are up 11% in the past year to 220.3p. However, they remain off their recent highs of 240p and look attractive, especially given the share buybacks planned.

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