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NatWest: Down After FY22 Results,

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Introduction

NatWest Group plc (NYSE:NWG) released their full-year 2022 results earlier markets opened this greeting (Friday, 17 February). NWG shares fell sharply connected opening and are down 6.6% successful London arsenic of 12:35 section time.

At 285.4p, NatWest shares are presently up 10% successful nan past year, having rallied powerfully from October 2022 lows:

NatWest Share Price (Last 1 Year)

NatWest Share Price (Last 1 Year)

Source: Google Finance (17-Feb-23).

(Lloyds Banking Group PLC (LYG), already Buy-rated successful our coverage, besides saw shares autumn 3% successful London this morning.)

NatWest banal is charismatic connected undemanding expectations. Shares are presently astatine 1.08x Tangible Book Value, implying a P/E of little than 10x moreover if Return connected Tangible Equity falls short of management's 14-16% medium-term targets. The dividend output is astir 5%, supplemented by buybacks. Net Interest Income is apt to beryllium resilient acknowledgment to NatWest's inexpensive deposits, and much of Non-Interest Revenues are successful recurring business lines. Cost power is beardown and Cost/Income Ratio is expected to amended again successful 2023. Potential in installments losses successful nan arena of a U.K. downturn correspond nan main risk, though investors are besides worried astir Net Interest Margin having peaked. Growing dividends, mean net maturation and a mini re-rating up to 10x should present a 10%+ annualized return. Buy.

NatWest Company Overview

NatWest, formerly nan Royal Bank of Scotland (or RBS) is 1 of nan Big 4 U.K. banks successful nan U.K., chiefly focused serving U.K. consumers and businesses, pinch immoderate vulnerability to Europe and nan remainder of nan world done corporates.

NatWest reports successful 3 segments, pinch Retail Banking generating astir 50% of its Operating Profit successful 2022, Commercial & Institutional ("C&I") generating astir 45%, and Private Banking generating astir 5%; a erstwhile 4th segment, Ulster Bank RoI (Republic of Ireland) is presently successful run-off mode.

NatWest Key Financials by Segment (2022)

NatWest Key Financials by Segment (2022)

Source: NatWest results merchandise (Q4 2022).

C&I has assets and Risk Weighted Assets that are 90% larger than Retail Banking's, arsenic good arsenic a higher Net Interest Margin ("NIM"), but generates a Return connected Tangible Equity ("ROTE") that is little than half of Retail Banking's. This is apt owed to C&I loans carrying overmuch higher consequence weights than unit mortgages and having a Cost/Income ratio that is much than 10 ppt worse than Retail Banking's.

NatWest is simply a comparatively lending-centric bank, pinch astir 75% of its Total Income coming from Net Interest Income ("NII") successful 2022. Lending fees connected in installments accommodation accounted for different 5% of Total Income.

NatWest had to beryllium rescued by nan U.K. authorities during nan Global Financial Crisis and has undertaken extended restructuring successful nan consequent years. Total assets person been reduced by adjacent to half (from £1,312bn to £720bn) betwixt 2012 and 2022 year-ends, and nan Cost/Income ratio has improved from 101% to 56%.

NatWest Key Performance Indicators (2008-22)

NatWest Key Performance Indicators (2008-22)

Source: NatWest results position (Q4 2022).

The U.K. authorities still owns 44% of NatWest's equity, but has been progressing reducing its holding, astir precocious selling different 1% connected February 2. We expect them to afloat exit their position successful owed course.

NatWest targets a 14-16% ROTE for nan medium-term, and guides to nan aforesaid for 2023:

NatWest Medium-Term Targets & 2023 Outlook

NatWest Key Performance Indicators (2008-22)

Source: NatWest results position (Q4 2022).

NatWest is actively returning superior to shareholders, targeting a payout ratio of 40% for dividends and aiming to repurchase its ain shares erstwhile location is capacity. It returned £3.8bn successful 2021 and £5.1bn successful 2022, including done typical dividends, compared to a existent marketplace capitalization of £27.6bn, though this was helped by NatWest's Common Equity Tier 1 ("CET1") ratio having started 2021 astatine 18.5%, importantly successful excess of nan 13-14% target.

CET1 was 14.2% astatine 2022 year-end, still supra nan target range, which intends NatWest is apt to proceed to return a important portion of its net (with immoderate net retained for growth).

2022 results were strong, helped by liking complaint increases, bully costs control, and debased in installments costs.

NatWest 2022 Results Headlines

In 2022, NatWest achieved a ROTE of 12.3%, 3 ppt higher year-on-year, including a ROTE of 20.6% successful Q4.

NatWest Results Headlines (Q4 & FY 2022 vs. Prior Periods)

NatWest Results Headlines (Q4 & FY 2022 vs. Prior Periods)

Source: NatWest results position (Q4 2022).

Operating Profit grew 33.5% successful 2022, helped by NII rising 31.7% (thanks to liking complaint increases), Non-Interest Income rising 18.5%, Total Operating Expenses falling 0.9% year-on-year, and Impairment Losses being conscionable £337m.

The aforesaid dynamics person continued successful Q4. NII grew by 10.2% sequentially, Total Operating Expenses were down 8.2% year-on-year, and Impairment Losses were a constricted £144m. Operating Profit much than doubled year-on-year.

Management continues to expect ROTE to beryllium 14-16% successful 2023.

We judge NatWest's semipermanent ROTE is improbable to autumn overmuch beneath nan 12.3% achieved successful 2022, moreover if it does not it management's 14-16% target (for some 2023 and nan mean term), based connected structural drivers successful its businesses.

Net Interest Income Backed by Cheap Deposits

NatWest is apt to proceed to spot beardown NII, backed by its inexpensive deposits and immoderate indebtedness growth.

NatWest's NIM improvement during Q4 2022 showed nan powerfulness of its inexpensive deposits. While NIM saw flimsy dilutions from each of Mortgages, Unsecured (personal loans) and C&I Loans, it saw gains successful some Personal and C&I deposits:

NatWest Net Interest Margin (2022-23E)

NatWest Net Interest Margin (2022-23E)

Source: NatWest results position (Q4 2022).

Full-year 2022 NIM of 285 bps was a important description from nan 230 bps fig successful 2021. 2023 NIM guidance of 320 bps represents different summation year-on-year, though a mini diminution from Q4 2022's 320 bps. The diminution is owed to expectations that much of caller complaint increases will person to beryllium passed connected to customers, from 35% truthful acold to an expected 50%, and is simply a earthy arena successful each rates rhythm and besides included successful guidance fixed by U.S. banks

In nan arena of a U.K. recession, liking rates will autumn again. Market expectations are for U.K. liking rates to commencement falling successful 2024. However, NatWest's inexpensive deposit guidelines should thief offset overmuch of these headwinds.

NatWest's inexpensive deposit guidelines is nan consequence of nan mission-critical quality of its products and longstanding relationships pinch customers, pinch galore choosing to support balances successful low- aliases zero-rate accounts for operational reasons aliases retired of marque loyalty. Management has a stated strategy to not compete aggressively for deposits connected price.

Higher liking rates successful 2022 person only very constricted effect connected NatWest deposits. 40% of NatWest's £433bn customer deposits stay successful non-interest-bearing accounts. Total business conception deposits fell by only 2.9% successful 2022, and declines were concentrated successful much blase and rate-sensitive C&I accounts; Retail Banking deposits were flattish overall, and Private Banking deposits really grew, pinch a mini migration from Current Accounts to Savings:

NatWest Deposits (Q4 & FY 2022 vs. Prior Periods)

NatWest Deposits (Q4 & FY 2022 vs. Prior Periods)

Source: NatWest results position (Q4 2022).

Q4 2022 saw a somewhat larger 3.4% diminution successful business segments deposits from Q3, successful portion because NatWest continues to debar competing connected value and has overmuch much than it needs.

(Most of nan 2022 diminution successful "Central & Other" deposits was owed to a simplification successful Ulster Bank RoI deposits from £18.4bn to £6.2bn arsenic portion of NatWest's phased withdrawal there.)

NatWest's Moderate Loan Growth

NII is supported by mean indebtedness growth. Total loans grew by 2% successful 2022, pinch an 8% maturation successful Retail Banking, a 4% maturation successful each of Private Banking and C&I, offset by a diminution successful Central & Other (which includes Ulster Bank RoI):

NatWest Loan Balances by Segments (Q4 2022 vs. Prior Periods)

NatWest Loan Balances by Segments (Q4 2022 vs. Prior Periods)

Source: NatWest results position (Q4 2022).

NatWest continues to person little successful deposits than tin beryllium supported by its deposits, pinch Loan/Deposit Ratio astatine conscionable 79% for nan group, including 105% successful Retail Banking, but arsenic debased arsenic 64% successful C&I and 47% successful Private Banking.

Excess deposits are partially deployed successful a "Product Structural Hedge," which has a notional worth of £184bn and a output of 1.16% astatine nan extremity of Q4 2022. This output is little than marketplace rates and should emergence arsenic parts of nan hedge gradually mature and are redeployed (with half nan use expected successful 2023); nan use is included successful 2023 NIM guidance.

Non-Interest Income Relatively Resilient

NatWest's Non-Interest Income is partially influenced by macro conditions, but should beryllium resilient overall.

As of 2022, 28% (£886m) of Non-Interest Income is successful Trading & Other Income, which is partially driven by customer activity. The remaining 72% (£2,292m) is Net Fees & Commissions and consists of a number of different lines.

NatWest Fees & Commissions (Since Q4 2021)

NatWest Fees & Commissions (Since Q4 2021)

Source: NatWest results position (Q4 2022).

With Net Fees & Commissions, "Payment Services" and "Investment Management, Underwriting, Other" are astatine slightest partially recurring, are increasing structurally and should beryllium resilient successful a downturn. The levels of "Lending (Credit Facilities)" and "Credit & Debit Card Fees" whitethorn beryllium much influenced by macro conditions.

Good Cost Control Protects Earnings

Cost power is strong, and Cost/Income Ratio is expected to amended again successful 2023, which should thief protect ROTE.

Other Operating Expenses (i.e., expenses excluding Litigation & Conduct Costs) are expected to turn by 5% successful 2023, excluding nonstop costs related to nan Ulster Bank RoI conception now successful run-off, pinch savings offsetting ostentation and growth.

NatWest Operating Expenses (FY22-23E)

NatWest Operating Expenses (FY22-23E)

Source: NatWest results position (Q4 2022).

Cost/Income Ratio is expected to beryllium little than 52% successful 2023, a further betterment from nan 55.5% fig successful 2022. This includes £300m of Ulster Bank RoI expenses, which are down from £433m successful 2022 and should vanish successful 2024.

NatWest targets a Cost/Income Ratio of little than 50% by 2025, and we judge this is achievable. Banks are level businesses pinch earthy operational leverage and economies of scale, and NatWest's investments successful exertion successful caller years person helped it go much efficient.

NatWest Credit Losses Should Stay Limited

Potential in installments losses successful nan arena of a U.K. downturn correspond nan main consequence to our finance case.

NatWest's indebtedness book is 92% U.K., including 54% successful U.K. Mortgages. The remainder is reasonably diversified, pinch Credit Cards being little than 4% and Commercial Real Estate each being little than 5%.

NatWest Loan Book By Geography/Segment (2022)

NatWest Loan Book By Geography/Segment (2022)

Source: NatWest yearly study (2022).

Management besides stated that they person "low exposure" to perchance problematic sectors specified arsenic Retail (£8.4bn), Automotive (£7.3bn) and Leisure (£7.5bn).

NatWest's Mortgage portfolio has a Loan-To-Value ("LTV") of 53%. 66% of nan portfolio is connected 5-year fixed complaint products, but 25% is connected 2-year fixed; 10% is to Buy-To-Let ("BTL") customers.

NatWest Mortgage Book Snapshot (2022)

NatWest Mortgage Book Snapshot (2022)

Source: NatWest results position (Q4 2022).

Estimated Credit Loss provisions were 0.91% of group loans (excluding disposal group loans) astatine 2022 year-end, consisting of £3.43bn of provisions connected £379bn of loans. Small percent swings successful in installments losses tin person a awesome effect connected group net (Operating Profit was £5.13bn successful 2022) and superior (Tangible Book Value was £25.5bn).

Impairments person remained debased successful caller years (except for a spike successful provisions successful 2020 for COVID-19 that was reversed successful 2021), and guidance is guiding to an Impairment Rate of 20-30 bps successful 2023, somewhat higher than 2019 (21 bps).

NatWest Loan Impairments (FY16-23E)

NatWest Loan Impairments (FY16-23E)

Source: NatWest results position (Q4 2022).

NatWest could beryllium a mediocre finance should a awesome U.K. economical downturn materializes.

NatWest Valuation

As of 12:35 p.m. successful London, NatWest shares are astatine 285.4p. This represents a valuation of:

  • 1.08x P/TBV, comparative to Q4 2022 TBV of 264p per share
  • Less than 10x P/E, provided ROTE is supra 10.8% (vs. 14-16% guided)
  • 4.7% Dividend Yield, comparative to 2022 regular dividends of 13.5p.

Relative to 2022 EPS (33.8p), nan P/E is 8.4x. If NatWest achieves nan mid-point of its 14-16% ROTE guidance, past its P/E aggregate will beryllium moreover little astatine 7.2x.

The "less than 10x P/E" successful our much pessimistic assumptions nevertheless represents an net output of much than 10%. While guidance only targets a Dividend Payout Ratio of 40%, we expect astir of nan remainder of nan net to beryllium spent connected buybacks, which should besides use shareholders successful nan shape of a little stock count and a higher EPS (which will construe backmost to a higher dividend).

NatWest really declared 30.3p of dividends successful 2022, representing a 10.6% Dividend Yield, but this includes 16.8p of typical dividends, arsenic NatWest started 2022 pinch a CET1 ratio of arsenic precocious arsenic 18.2% (vs. 13-14% targeted).

Even connected regular dividends alone, existent dividend output will almost surely beryllium adjacent to 5% (or higher) successful nan adjacent fewer years, arsenic EPS continues to turn (including from buybacks). A lower-growth script should besides spot NatWest needing little superior and frankincense distributing much successful dividends.

Conclusion

We expect NatWest banal to present a 10%+ annualized return by 2025 year-end, including:

  • Around 5% annualized return from dividends
  • 3-5% from EPS growth, including from buybacks
  • 1%+ from P/E re-rating to 10x.

A benign U.K. macroeconomic environment, particularly if a recession tin beryllium avoided, will consequence successful overmuch higher returns for NatWest Group plc.

However, NatWest banal could beryllium a bad finance successful nan arena of a awesome U.K. downturn.

We initiate our sum of NatWest Group plc pinch a Buy rating.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

This article was written by

Librarian Capital floor plan picture

Global, long-term, fundamentally-oriented & concentrated investing. With much than 10 years' buy-side experience, I look astatine stocks globally and crossed industries, pinch a attraction connected nan U.S. and U.K.. My investing style tin champion beryllium described arsenic "Quality Growth" aliases "Growth At a Reasonable Price". (previously penning nether nan sanction "Blue Sky Capital" until December 2019)

Disclosure: I/we person a beneficial agelong position successful nan shares of NWG either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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