Natwest Group Making Strides

Equity Analyst

Niklas Kammer

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. 

Although the U.K. is likely to drift into a recession, we believe NatWest is well positioned to benefit from the rising interest rate environment. Mortgage markets remain competitive, which in combination with funding costs increasing is squeezing mortgage margins. At the same time, NatWest's hedging portfolio and large deposit funding base will more than offset the short-term headwind in mortgage margins.

Investment spending should slowly shift toward digitalising the business as larger expense items, related to regulatory requirements such as ring-fencing, are in the rearview mirror.

NatWest has made significant strides repositioning itself toward structural profitability, allowing for enhanced shareholder distributions.

Business Strategy & Outlook

We do not assign a moat to NatWest. Although we believe its retail and small business banking operation benefits from a cost advantage through a large retail deposit base, we think this advantage is outweighed by what we view to be no-moat businesses that bind most of its capital. On a consolidated basis, we don’t expect NatWest to clear the cost of equity hurdle of 9% in midcycle conditions, even assuming that litigation and conduct costs fall away eventually. Underlying our moat assessment for NatWest is our view of the U.K. market, which we rate as fair overall, although we believe the competitive environment is good.

The U.K. government remains the majority shareholder in NatWest (stake 62%), which clearly does not contribute positively toward our moat assessment. Even though the government participation is silent in principal, anti-bank sentiment in the public could potentially affect NatWest more than peers as a result. On the other hand, we don’t see the government stake as a detrimental factor keeping NatWest from earning a moat in the future. The government’s clear intention is to liquidate the position, preferably at a profit. As such, we believe that should NatWest get into moaty territory, which would be reflected in above cost of capital returns in the future, the government would float all its shares and therefore resolve this issue. Nevertheless, its government participation remains a significant hurdle toward an affirmative moat rating for NatWest. 

Core and center to our moat methodology for banks is our view of the regulatory and competitive environment in which a bank operates. Our assessments range from Poor to Very Good, lowering or increasing the hurdle we think a bank needs to overcome to gain a moat. We see the regulatory environment as fair and note that it has improved significantly since the global financial crisis. Poor oversight was a key factor in U.K. banks' poor performance during the crisis. Anti-bank sentiment remains in the U.K., and banking regulation, partially as a result, changes frequently and is more onerous than elsewhere in Europe. We think that the higher cost of operating in the U.K. system, such as the bank tax and levy, will make it more difficult for U.K. banks to outearn their costs of equity over time. Additionally, regulatory changes such as ring-fencing requirements--the separation of U.K. retail from investment banking--increase pricing competition in retail lending and have been costly to implement for U.K. banks.

We think the competitive environment in U.K. for banks is good. The U.K. banking market is dominated by five high street banks (Lloyds, NatWest, Barclays, HSBC U.K., and Santander U.K.) controlling about 60% of gross lending assets. We think this constitutes a comfortable oligopoly, allowing the largest banks in the system to realize scale effects and reap the rewards from a high share of cheap and sticky deposit funding. Indeed, we find that to a varying degree all five high street banks benefit from this market segmentation. While this does not result in a moat by default, we do think the good competitive environment in the U.K. is a supportive factor in a bank’s ability to carve out a moat. 

On a stand-alone basis, NatWest's retail and small-business banking operation could warrant a narrow moat rating. As one of the five high street banks in the consolidated U.K. market, we believe NatWest enjoys cost advantages in the form of a sizable deposit base establishing a low cost and sticky funding source. We typically assign moat ratings for retail and commercial operations based on access to a large pool of deposit funding, particularly non-interest-bearing checking accounts, which form one of the cheapest types of funding a bank can obtain. The strength of a moat based on this potential funding advantage is enhanced if we find switching costs that prevent clients from moving this inexpensive source of funding to competitors in search of higher rates. Preferably, the deposit base consists mostly of retail rather than wholesale deposits, as the former tend to be stickier and lower cost compared with the latter. 

NatWest operates the second largest retail deposit base (GBP 180 billion) after Lloyds (GBP 236 billion). Additionally, we think the bank holds a leading market share in U.K. current accounts, the cheapest and stickiest source of funding. The segment contributes about 47% to the group’s total income and binds about 24% of the group's risk-weighted assets. Returns on equity (about 24%) and on a risk-adjusted basis (about 5.5% pretax) look good and roughly in line with other high street banking peers, which we think equally benefit from funding cost advantages in their respective U.K. retail segments.

Despite NatWest’s strong retail market position in the U.K., we do not award the group a moat. About one third of risk-weighted assets are tied up in unprofitable businesses (Ulster Bank RoI, 9%, and NatWest markets, 24%), which form a significant drag on overall results. The commercial bank performs well, with risk-adjusted pretax returns around 2%, but we don’t find structural competitive advantages in this business. The commercial bank is the largest segment by risk weighted assets (36% of total RWA). In sum, 69% of risk-weighted assets, and therefore capital, are deployed in what we believe are no-moat businesses.

None

Economic Moat

NatWest Group plc 

NatWest Group Plc engages in the provision of international banking and financial services. It operates through the following segments: Personal and Business Banking, Commercial and Private Banking, RBS International (RBSI), NatWest Markets, and Central Items and Other. The Personal and Business Banking segment consists of the United Kingdom Personal, Business Banking, and Ulster Bank RoI sub-segments. The Commercial and Private Banking segment covers the Commercial Banking, Private Banking, and RBS International Commercial Banking sub-segments, involved in serving retail, commercial, corporate, and financial institution customers. The RBSI serves retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar and financial institution customers in Luxembourg and London. The NatWest Markets offers corporate and institutional customers global market access, providing them with trading, risk management, and financing solutions. The Central Items and Other segment include corporate functions, such as RBS treasury, finance, risk management, compliance, legal, communications, and human resources. The company was founded on March 25, 1968 and is headquartered in Edinburgh, the United Kingdom.

Earnings data Q2 2023

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Ireland's Finance Ministry and Britain's NatWest Group said on Friday they had jointly sold 54.6 million shares in Permanent TSB representing 10% of the Irish bank's share capital.

Ireland, NatWest sell 10% of lender Permanent TSB

NatWest Group PLC (LSE:NWG) has netted €55.2mln after completing the sale of part of its stake in Permanent TSB Group Holdings PLC (PTSB), the Irish bank. The Minister for Finance of Ireland and NatWest have sold 10% of PTSB representing 54.6mln shares.

NatWest reduces stake in Ireland's Permanent TSB

The Irish state and British lender NatWest Group said on Thursday they would sell a combined 6% holding in Irish bank Permanent TSB.

Irish state, Britain's NatWest to sell 6% stake in Permanent TSB

HSBC Holdings

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Expected easing in the current pressure on UK bank profit margins towards the end of the year should benefit the likes of HSBC, NatWest and Virgin Money more than Lloyds Banking. That is the view of analysts at RBC Capital Markets, who calculate that the headwinds on net interest margins – the difference between the amount a bank earns on its loans and pays out on its deposits – are going to subside by the end of 2023 and turn into a “small tailwind” in 2024.

Lloyds to benefit less than HSBC, NatWest as mortgage market pressures ease - broker

UK's blue-chip index edged higher on Monday, with NatWest shares rising after it agreed to buy 1.3 billion pounds ($1.6 billion) worth of its shares back from the government, although lingering uncertainty over the U.S. debt ceiling impasse weighed on overall mood.

FTSE 100 edges higher as NatWest, StanChart shares rise

NatWest Group PLC (LSE:NWG) has bought back around 469mln shares from the Treasury further reducing the Government's stake in the bank. In a statement, the high street lender said it had agreed the off-market purchase of 469.mln shares at a price of 268.4p each in a deal worth £1.26bn.

NatWest buys back £1.26bn worth of shares from Government

Britain's stake in Natwest fell to 38.6% after it sold about 1.26 billion pounds ($1.59 billion) of its shares, according to a regulatory filing.

UK govt sells 1.26 bln stg of shares in Natwest

NatWest shares have slipped in recent weeks, and they once again trade at a discount to tangible book value. Business has thus far remained quite resilient, helped by a concentrated domestic banking market that gives it an edge on funding costs.

NatWest: Cheap Again After The Recent Sell-Off

NatWest Group plc (NYSE:NWG ) Q1 2023 Earnings Conference Call April 28, 2023 4:00 AM ET Company Participants Alison Rose - Chief Executive Officer Katie Murray - Chief Financial Officer Conference Call Participants Rohith Chandra-Rajan - Bank of America Alvaro Serrano - Morgan Stanley Chris Cant - Autonomous Aman Rakkar - Barclays Ed Firth - KBW Jonathan Pierce - Numis Jason Napier - UBS Fahed Kunwar - Redburn Rob Nobel - Deutsche Bank Raul Sinha - JPMorgan Omar Keenan - Credit Suisse Martin Leitgeb - Goldman Sachs Guy Stebbings - BNP Paribas Exane Operator Good morning and welcome to the NatWest Group Q1 Results 2023 Management Presentation. Today's presentation will be hosted by CEO, Alison Rose; and CFO, Katie Murray After the presentation, we will open up for questions.

NatWest Group plc (NWG) Q1 2023 Earnings Call Transcript

NatWest Group PLC on Friday said its income and pretax operating profit grew ahead of expectations in the first quarter of 2023 and that it is retaining its full-year guidance.

NatWest says income and profit higher than forecast

British bank NatWest posted better than expected profit for the first three months of 2023 as income soared 37%, even as inflation hammered households and fierce pricing competition squeezed the bank's customer deposits.

NatWest beats profit forecasts despite UK inflation squeeze

NatWest Group PLC (LSE:NWG) reported strong growth in revenue and profit in the first quarter but said deposits had fallen as competition hots up. The FTSE 100-listed lender described the performance as “strong” with operating profit before tax of £1.82bn, up from £1.22bn a year ago, and ahead of City forecasts of £1.6bn.

NatWest profit beats City expectations but deposits slip

Payday for many, the last Friday of the month will bring a lighter results day, including from NatWest Group PLC (LSE:NWG), where one of the biggest hedge fund firms in the world recently took a record short position in the lender. London-based Marshall Wace has taken a £155.6mln short, the largest disclosed short position against the bank since records began in 2012.

NatWest earnings on Friday to close out a busy week

NatWest (LON: NWG) share price rose sharply, helped by the strong results from Barclays. The stock jumped to a high of 274.8p, which was slightly higher than this week's low of 264p.

NatWest share price after the strong Barclays earnings

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NatWest Group PLC (LSE:NWG) chairman Howard Davies has initiated a search for his replacement after confirming he'll step down by July 2024. The UK bank's chair has served for eight years on the board and will be looking to hand over his role when he reaches his ninth – the maximum recommended length by the UK corporate governance code.

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UK banks NatWest, Lloyds and Barclays fell ahead of the release of quarterly results later this week and next as numbers from rival Santander UK were weaker than expected, with higher costs, credit impairment charges and provisions. The UK arm of Spain's Banco Santander (LSE:BNC) still reported 11% growth in total operating income to £1.31bn and an 11% rise in profit before tax to £547mln.

Santander UK 'weaker' first-quarter numbers send rival bank shares lower

The chairman of NatWest Howard Davies, one of the most storied figures in UK finance, said on Tuesday he would leave the British bank by next year, paving the way for a boardroom revamp of the lender still around 40% owned by the UK taxpayer.

NatWest Chairman Howard Davies to leave bank by next year

Upcoming results from FTSE-listed high street banks will be monitored for excess profits after some have been told to get a move on by the City regulator after being too slow to raise interest rates on their savings accounts, while also penalising loyal customers in comparison with newcomers. Standard Chartered PLC (LSE:STAN) kicks off bank results season next Wednesday, followed by Barclays PLC on 27 April and NatWest Group PLC (LSE:NWG) on 28 April.

Upcoming results from Lloyds, NatWest under scrutiny as banks profiting from interest rate rises, say MPs

Marshall Wace, a UK-based hedge fund, has taken a £155.6mln short position against NatWest, the largest-ever disclosed short position against the bank since records began in 2012. Latest disclosures to the UK's Financial Conduct Authority (FCA), show that the fund increased its bet against the high-street lender last month, bolstering its position to 0.61%.

NatWest has its largest ever short against it after Marshall Wace builds position

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The UK government has extended the time frame during which it intends to sell part of its stake in Natwest Group PLC to August 2025, two years later than originally planned. Under the arrangement, managed by Morgan Stanley (NYSE:MS), the Treasury aims to sell up to, but no more than, 15% of aggregate total trading volume in the company at a price the government considers fair value.

Government extends timeframe for sale of NatWest holding

The UK government said on Monday it had extended the time during which it intends to sell part of its stake in lender Natwest to Aug. 11, 2025, two years later than originally planned.

News for NatWest Group plc Stock (NWG)