- Jefferies increase their price target to 424p, representing 62% upside
- NatWest to benefit from further rate increases
- 16% Return on Tangible Equity to drive investor interest in NatWest
American investment bank Jefferies has upgraded their pre-provision profit for NatWest (NWG) by 14% and 11% for full year 2022, 2023 and 2024 respectively.
This underpins their decision to raise their price target from 359p to 424p, representing 64% upside at the current level of 258p.
Research by Jefferies 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.
At first quarter results NatWest management set a revenue target of ‘comfortable above £11 billion’.
Following this the Bank of England has increased rates by 100 basis points. This was reflected at the second quarter results as the group guided to full year revenue guidance of ‘around £12.5 billion’.
Given the robust nature of UK inflation, money markets are pricing in several additional rate rises this year, with rates peaking at 3.25% next year.
If this scenario proves to be correct then other analysts will also upgrade their net income and earnings estimates.
POTENTIAL TO IMPROVE RETURNS
Jefferies believes NatWest has the potential to generate rates of return approaching 16% by 2024.
The American investment bank believes ‘the path towards making money in NatWest has more to do with greater investor appreciation of the return on tangible equity potential of this bank’.
At the second quarter results (29 July), return on tangible equity moved up 3.9 percentage points to 15.2% year-on-year which comfortably exceeded consensus estimates of 9.1%.
Management significantly upgraded their 2023 return on tangible equity target to 14% to 16% versus previous guidance of ‘comfortably above’ 10%.
This step change in returns was reflected in both the larger-than-anticipated first-half dividend of 20.3p per share and a special dividend of 16.8p per share.
The latter was equivalent to 7% of the company's market capitalisation.
