NatWest shares at 15-year high after cracking Q3 results

This is a sparkling set of numbers by any standards, as NatWest Group (LSE:NWG) continues its relentless recovery from its historic woes.

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As far as investors are concerned, NatWest is in a sweet spot. The government shackles have gone, the group has prodigious amounts of cash, and acquisitions to boost growth further seem likely.

Indeed, it remains to be seen whether this new-found freedom will enable a more aggressive acquisition policy, with NatWest already having made what it described as two significant purchases in the form of Metro Bank’s mortgage book and Sainsbury’s Bank and reportedly having been rebuffed in an approach for Santander’s UK operation.

Its significant cash generation will provide an interesting dilemma on whether to continue to bolster shareholder returns, make further acquisitions, invest heavily in the business particularly in regard to growing digitalisation, or perhaps a combination of all of these options.

At the headline level, profit of £1.68 billion was 35.1% higher than the previous year, with operating profit up by 30% to £2.18 billion, comfortably ahead of the expected £1.83 billion. Total income rose by 15.7% to £4.33 billion, again ahead of the £4.1 billion estimate. Within its three main units, operating profit rose by 30% to £850 million in Retail Banking, by 20% to £108 million in Private Banking and Wealth Management and by 2.4% to £1.04 billion in Commercial & Institutional.

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Revenue generally was boosted by both loan growth and structural hedge income, as well as a £4.4 billion increase in lending activity which included £1.7 billion of mortgage activity within Retail Banking. Possibly the only blot on the landscape was a decline of £1.1 billion in deposits, although given that assets under management and administration rose by 8.1% to £56 billion, this is of limited concern.

Higher income was also accompanied by operating costs which increased by 9.4% to £2 billion, although the reduction in the cost/income ratio from 52.8% to 47.8% in the year to date is likely to prove a sector-beating number.

Other key metrics also reflected strong progress, with a Return on Tangible Equity (ROTE) of 22.3% against 18.3% in the corresponding period, while a capital cushion or CET1 ratio of 14.2% breezed past the previous 13.6% number. There was an additional impairment charge for the quarter of £153 million, which compares to £245 million in the corresponding period, which is as much a measure of prudence rather than any underlying credit deterioration.

As a result, NatWest also raised its guidance for the full-year outlook, with income now expected to hit £16.3 billion and the ROTE to be in excess of 18% from the previous 16.5% level.

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There is almost nothing of note for the bears to feed on from these results and the reaction at the open is one of warm appreciation. Investors have been handsomely rewarded in the recent past, where over the last year, a 53% hike in the share price compares to a gain of 15.8% for the wider FTSE100 which in turn has contributed to a rise of 153% over the last two years.

The current dividend yield of 4.6% is another attraction amid the group’s generous shareholder returns programme, and the market consensus of the shares as a comfortable buy is pushing Barclays (LSE:BARC) hard to become the preferred play in the sector.