NatWest shares rewarded for half-year profit surge

NatWest Group (LSE:NWG) has followed the trend seen in the results season so far, with a strong second quarter leading to an extremely healthy performance for the first half, which positions the bank for another year of meaningful progress.

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Indeed, it seems that NatWest has taken the hint from the market and not fallen again into the trap of tepid guidance, which blighted the reaction to the first-quarter update. This time around, the outlook is rather more positive, with estimates for full-year income being raised to £17.9 billion (previously in a range £17.2-17.6 billion) including a contribution of £275 million from Evelyn Partners and a return on tangible equity (ROTE) of more than 19% (17%). In addition, 2028 projections aim for a cost/income ratio of less than 45% and a stabilising ROTE of more than 18%, all of which paint a brighter picture for investors.

More broadly, NatWest is now enjoying a new lease of life. Its prodigious cash generation has enabled a generous round of shareholder returns, while it apparently remains on the acquisition trail, even if some questioned the £2.7 billion price paid for its recent purchase of Evelyn Partners in the wealth management space.

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However, this new-found freedom has already enabled a more aggressive acquisition policy, with NatWest having previously made what it described as two significant purchases in the form of Metro Bank’s mortgage book and Sainsbury’s Bank, both of which it would appear have been integrated seamlessly. In addition, there is little doubt that the acquisition of Evelyn Partners will lift the Private Banking and Wealth Management business to another level.

The performance in the first half was comfortably ahead of expectations and breezed past the corresponding period. Total income of £8.86 billion was 11% ahead of the previous year, and operating pre-tax profit of £4.32 billion was 20.4% higher. Within its three business units, operating profit rose by 16% to £1.73 billion in Retail Banking, by 18% to £212 million in Private Banking and Wealth Management and by 15% to £2.28 billion in Commercial & Institutional (C&I).

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These hikes were accompanied by equally impressive in improvements in the ROTE, where Retail grew from 23.8% to 27.1%, Private Banking from 19.8% to 23.8% and C&I from 18.6% to 20.3%, leading to a group number overall which at 19.7% eclipsed the 18.1% from the corresponding period.

Revenue generally was boosted by loan growth, higher customer balances and structural hedge income, the latter of which is expected to add an additional £1.5 billion of income this year and a further £1 billion next year. Net Interest Income grew by 12% to £6.89 billion, while lending increased by £17 billion due to strength both in retail mortgages and C&I, and deposits by £5.9 billion, with customer impairments of limited concern.

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NatWest had previously described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain, and levels of default overall remain low and stable. Nonetheless, the group has taken a charge of £423 million, including an additional £140 million in the second quarter, partly arising from modelling of MES (multiple economic scenarios). Of course, the number represents a prudent provision rather than any actual underlying deterioration in credit.

There are few concerns with NatWest’s stability and balance sheet strength, as evidenced by the key metrics. The capital cushion, or CET1 ratio, is at 13.2% and ahead of the 13% target and Net Interest Margin improved to 2.48% from the 2.28% previously recorded. Along with the higher income, an additional £250 million of cost savings were achieved in the half, leading to a sector-beating cost/income ratio of 46%, notably lower than the 48.8% of last year.

There is further positive news as NatWest announced it would likely return to a share buyback programme alongside the full-year results, which would be six months ahead of schedule if actioned. In the meantime, the group has hiked the interim dividend, leading to a projected yield of 5.1%, which more than pays investors to wait in anticipation of further returns.

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Overall, with high performance comes high expectations, and NatWest has delivered today. The warm reaction to the numbers reflects some relief and adds to a share price which has risen by 29% over the last year, as compared to a gain of 19% for the wider FTSE100, and by 110% over the last two years.

For slightly different reasons the group finds itself at the top of the tree alongside Barclays, and the market consensus of NatWest as a strong buy will no doubt remain in place.