-Shares jump on earnings beat and raised guidance
-Special dividend equivalent to 7% of market capitalisation
-Results confirm group as standout beneficiary of rising rates
Shares in NatWest Group (NWG) jumped 7% in early trading following the release of second quarter results that were significantly ahead of market expectations.
Management have significantly upgraded their 2023 return on tangible equity target to 14-16% versus previous guidance of ‘comfortably above’ 10%.
The group has also announced a special dividend of 16.7p (equivalent to 7% of the company's market capitalisation).
Reported profit before tax increased by 20% year on year to £1.55 billion, ahead of a consensus forecast of £1.05 billion.
Earnings per share jumped 33% year on year to 10p, considerably ahead of a 6p consensus estimate.
The interim dividend of 20.3p per share was much larger than anticipated (5.2p), and included an ordinary payment of 3.5p per share and a special dividend of 16.8p per share.
The latter had not been anticipated, although analysts had expected a £720 million share buyback.
Return on tangible equity moved up 3.9 percentage points to 15.2% year-on-year which comfortably exceeded consensus estimates of 9.1%.
The CET1 ratio fell from 18.2% to 14.3%, in response to larger than expected shareholder payouts coupled with the impact of regulatory changes.
STANDOUT WINNER FROM INTEREST RATE RISES
Research by Numis has examined the impact a 25 basis point interest rate increase has on the net interest income of UK banks.
NatWest Group is the standout winner. For every quarter point rise in interest rates its net interest income experiences a 5.5% uplift to its net interest income.
This is one of the key reasons why it is one of the largest active positions in the Edinburgh Investment Trust (EDIN).
Fund manager James de Uphaugh explains:
‘The period since the Great Financial Crisis in 2008, has not been a normal period for banks. Many have been in cash deleveraging mode working through bad loans and rebuilding their capital levels under the hawkish eye of regulators. UK base rates have been on the floor over the period so NatWest, which has a 16% share of the deposit market has struggled to make a normal margin’
‘All this is changing, however, the UK five year swap, a good proxy for what banks have to roll their five hedge at, has more than double to 2.4%.’
‘We favour NatWest given the de-risking of its loan book over the last few years. It currently stands at over a 25% discount to tangible book value and should generate a return on tangible equity above 12% over the next few years as interest rates begin to normalise’
EXPERT VIEW
Commenting on today’s results Shore Capital banking analyst Gary Greenwood said:
‘NatWest’s shares are up 2% year to date but we expect them to push on today. At yesterday’s closing price of 230p, NatWest trades on a trailing price/tangible net asset value of 0.9x versus a revised target return on tangible equity of 14-16% in 2023 which would likely be best in class. There is currently 17% upside to our last published fair value of 270p’.
