NatWest shares drop despite bumper buyback

On the surface, NatWest (NWG) achieved all it could feasibly accomplish for the year. The bank announced a new £800mn share buyback programme, profits up more than 34 per cent and a return on tangible equity that topped 12 per cent, with a forecast that this will rise to 14-16 per cent this year. However, the City is not in a forgiving mood at the moment and, as with Barclay’s (BARC), a marginal miss on net interest margin forecasts sent the shares sharply lower on results day.

The main surprise was the new share buyback programme for the first half of this year. When combined with total dividends, the bank will have distributed £5.1bn deducted from its capital, or 53p per share of total returns. The catalyst for such generosity is the net interest margin underpinned by higher central bank interest rates. This margin stood at 2.85 per cent for 2022, up 55 basis points on the 2021 average. However, management forecast this year's figure will be 3.2 per cent - equal to that achieved in the fourth quarter of last year and below the level forecast by analysts.

This disappointing outcome is related to the one percentage point rise in the bank’s cost/income ratio to 74.4 per cent. This could be a sign that stripping out further costs is going to be an uphill struggle. Prior to these results, NatWest had successfully stripped out 25 per cent of its cost base, primarily through branch closures.

The shares, at 6.4 times 2023’s earnings, are not expensive and the bank retains its position as the best geared to the UK lending market and with capital to spare. Buy.

Last IC View: Buy, 253p, 1 Aug 2022