NatWest builds on a solid start

Like all the systemically important UK banks, NatWest (NWG) benefited heavily in its interim results from government action to prevent the economy imploding during the lockdown periods. Loan impairments were a mere 0.38 per cent of the bank's total book, compared with 1.6 per cent this time last year, and resulted in an impairment credit of £605m. This reflected a slowdown towards default that was largely the result of the furlough programme and government loans to businesses. The sense of relative corporate stability allowed the return of an interim dividend and a £750m share buyback scheme.

The heartening thing about NatWest is that management has clearly put the ill-fated attempt to turn a middling Scottish institution into the Single Biggest Bank in the Universe behind it. Now, the emphasis is all on incremental growth in its home market and maintaining wide margins of safety. The surest measure of this is that it has maintained its market-leading common equity tier-1 (CET1) percentage of risk-weighted assets of just over 18 per cent - double the minimum requirement. Investors with long memories will remember that this key ratio hovered around 7.3 per cent in the years prior to RBS’s State-backed rescue, and that it fell to a dangerously low 4 per cent once the full detrimental impact of the ABN-Amro takeover finally vomited on the balance sheet in 2008.   

That NatWest enjoys a much better CET1 ratio, is mainly because the self-same balance sheet, with total assets of £775bn, is simply more manageable than the £1.9 trillion Frankenstein the bank had in 2007. It also has much better liquidity – this rose by £14bn in the second quarter alone to £277bn by the end of the half.

The current operational priority is to complete the unwinding of its operations in Ulster bank and to update its technology and service in its home market. Once that process finishes, which will be at least another two years, the question then becomes how it will deliver shareholder returns within the context of a much narrower focus. One option floating around is that Natwest could return some CET1 capital to shareholders and aim for a long-term percentage of 14-15 per cent, which would not fundamentally jeopardise the stability of its balance sheet. 

Credit Suisse currently has NatWest on a forward P/E of 9.3 for 2022. That premium looks justified as the bank seems to recognise the limits of its ambitions. Hold.   

Last IC View: Hold, 174p, 19 Feb 2021