“It will be little consolation to chief executive Alison Rose but the fact that investors can find a £1 billion quarterly profit disappointing shows how far NatWest has come in its turnaround plan,” says AJ Bell investment director Russ Mould. “This is only the seventh quarter in the last five years when the bank has earned at least £1 billion, its balance sheet looks strong relative to regulatory requirements and NatWest felt able to reverse another £242 million of the loan loss provisions on its books as borrowers emerge from the pandemic and lockdowns in better shape than anticipated last year.
Source: Company accounts
“Yet the shares continue to trade at a discount to their stated tangible net asset value (NAV) of 269p a share, although the 18% discount is as low as it has been for some time. This perhaps explains why investors are being a little less forgiving when they study the third-quarter results.
|
|
2021E |
Q3 2021 |
2021E |
2021E |
|
|
P/E |
Price/book |
Dividend yield |
Dividend cover |
|
Lloyds |
7.2 x |
0.89 x |
3.5% |
4.00 x |
|
NatWest Group |
10.0 x |
0.82 x |
4.1% |
2.44 x |
|
HBSC |
10.5 x |
0.76 x |
4.0% |
2.37 x |
|
Barclays |
6.1 x |
0.70 x |
3.0% |
5.50 x |
|
Standard Chartered |
8.7 x |
0.53 x |
2.4% |
4.69 x |
Source: Company accounts, Marketscreener, consensus analysts’ forecasts, London Stock Exchange. Standard Chartered price/book multiple based on Q2 2021 results as Q3 results have yet to be published
“Investors will be a little frustrated to see the profit and loss account burdened by a further £294 million in litigation and conduct costs, to take the total to £22.5 billion over the past decade, and concerned to see the net interest margin slide again, down to just 1.54%.
“Both weighed on profits between July and September, although bulls of the stock will argue that litigation costs are still much lower than they used to be and that interest rate rises could help lending margins, if and when the Bank of England gets around to it. In addition, NatWest blamed the lending margin slip on how a one-off tax variable lease repricing gain at its commercial banking arm in the second quarter had not been repeated in the third.
Source: Company accounts
“Whether NatWest’s clients are looking forward to interest rate increases is another matter and the huge increases in Government, consumer and corporate debt over the past decade (and especially in the past couple of years) could yet act as a brake on economic activity – and thus banks’ profits – in the future. Loan growth is still subdued and customers are increasing their cash deposits at a faster rate.
Source: Company accounts
“Increased debt is therefore one challenge which continues to face NatWest (and its FTSE 100 banking peers), while regulation remains a constant issue, even if the Chancellor is reducing his banking profit surcharge to 3% from 8% from April 2023, and the competitive threat posed by challenger banks and upstart fintech rivals is ever present.
“Those three factors help to explain why the shares continue to trade at a discount to NAV per share, and that 269p-a-share book value figure shows just how far NatWest has to go before the Government will get a chance to sell any of its stake at or above the 502p price it paid to bail out the bank during the great financial crisis.”
