NatWest shares and income set to soar on interest rate rises

NatWest’s bottom line has been boosted by the Bank of England raising interest rates, with its 2021 annual results showing a major swing to profit. As the UK bank prepares to post its first quarter earnings for 2022, the stock has been flat as investor sentiment is tempered by the rising cost of living hurting consumer spending.

City analysts are forecasting mixed earnings growth for NatWest Group’s [NWG.L] first quarter results, giving the stock a slight lift ahead of the announcement on 29 April. Profits are expected to fall 5% year-over-year to £873m in the three months ended 31 March.

As a result, total income is predicted to reach £2.7bn, up from £2.65bn in the same period in 2021. Net loans to customers are tipped to come in at £358.3m, largely unchanged from this time last year, with customer deposits set to rise to £480.9m from £453.3m. The FTSE 100 bank’s lending division is likely to benefit from a favourable high interest rate environment, which the Bank of England has signalled that it will continue raising rates to combat rising inflation.

The UK bank’s — which last month returned to majority private ownership following its government bailout back in 2008 — financials will also be buoyed by the release of £1.28bn in reserves that had been set aside to cover potential loan losses from the Covid-19 pandemic.

Profits receive interest rate boost

Because NatWest is a cyclical stock, its profitability is largely reliant on the state of the UK economy. It is, therefore, exposed to the challenges customers are facing from the significant rise in the cost of living, from soaring energy bills to rising food and fuel prices.

This is down to the hike in global inflation that has been exacerbated by Russia’s invasion of Ukraine, which further accelerated the squeeze on food prices as commodity shortages rock economies around the world.

During the company’s fourth quarter results, which were released in February 2022, the group reported an operating profit before tax of £4.3bn, up from a loss of £351m in December 2020. Net lending also improved over the period by £7.8bn with customer deposits up to £479.8bn from £431.7bn a year ago.

Total income was £33m, or 2.9% higher than Q3 2021, reflecting higher mortgage balances, increased unsecured balances and improved deposit returns. This was also the case for NatWest’s private banking arm, but it dropped 2.1% in its commercial banking division due to reduced deposit returns in a low interest rate environment and lower lending volumes.

As a bellwether for the economy, NatWest’s upcoming earnings will likely give an indication to the trends and patterns in both customer and business lending in areas such as mortgages. Cashflow should be of little concern to the bank, however, given that it is set to see €6.4bn in proceeds from the sale of its Irish loan books to Permanent TSB.

Reassuring results fail to lift shares

The day after NatWest posted its positive annual results, shares in the company shot up 1.2%. Consensus analyst estimates indicate that investors expect the stock to continue to rise post-earnings, with majority rating it a ‘buy’, according to MarketScreener.

Compared to industry peers Barclays [BARC.L] and Lloyds Banking Group [LLOY.L], the NatWest share price has performed well in the year to date, rising 0.06% to close at 229.36p on 25 April. In comparison, Barclays and Lloyds have fallen 24.5% and 5.7%, respectively, in the same period. Rival HSBC [HSBA.L], on the other hand, has seen growth of 10.4% so far this year. But with analysts forecasting an average target price of 278p for NatWest, the stock could jump a further 21.2%.

As reported by the Fly, HSBC upgraded the NatWest Group stock to ‘buy’ with a 260p price target. Given the recent weakness in its shares, analyst Robin Down sees value in the NatWest name. “UK banks could provide near-term defensiveness against a backdrop where the UK economy is slowing with sharp rises in the cost of living,” Down said.

However, Investec analyst Ian Gordon, who has a 230p price target on the stock, prefers rivals such as Lloyds and Virgin Money [VUK.AX].

In the near-term, NatWest’s share price could also race ahead of competitors if media reports that it is eyeing up a £3bn bid for wealth management firm Tilney, Smith and Williamson come to fruition. Russ Mould, investment director at AJ Bell, told Proactive Investors that “wealth management can be reliable and high margin relative to wildly cyclical investment banking revenues or fiercely competitive retail, mortgage and business lending”.