NatWest only worth it for the income

It wasn’t a surprise that NatWest's (NWG) full-year figures delivered most of what it had already promised, having frontloaded the disappointment of its under-pressure net interest margin (NIM) in a prior trading update. However, the results were still impressive in the context of a prolonged period of underperformance and its turbulent corporate history; these were the first results for hurriedly appointed chief executive Paul Thwaite.

The net interest margin came in at a respectable 3.04 per cent (albeit below the forecast 3.15 per cent), with deposit churn of £14bn to blame as consumers shopped around for interest rate deals. It is a curio of bank balance sheets that lower deposit levels also reduced the bank’s leverage, and therefore the implied risk, as deposits are counted as liabilities. At the same time, lending was 2.6 per cent higher to bring the total book to £355bn, even though customers chose to pay-off a net £0.7bn of loans.

A further £300mn share buyback for 2024 was announced means that NatWest is on course to pay out the equivalent of 40p a share, or £3.6bn, in capital distributions, restoring the company’s status as a leading FTSE 100 income share for the first time since 2008.

With a return on tangible equity (RoTE) well above the guided range at 17.8 per cent, the bank is in good shape despite that RoTE being forecast to fall to 12 per cent as margins are compressed. It is no secret that the shares are heavily underwater at a forward price to earnings ratio of just 5.7 for 2024, with a forecast dividend yield of over 7 per cent. An incredibly cheap income share. Buy.

Last IC view: Buy, 243p, 28 Jul 2023