Does changing your name really make people forget about your troubled past? When it comes to NatWest Group (LSE: NWG), I do hope investors don’t forget it used to be Royal Bank of Scotland. You know, the one managed by (ex Sir) Fred Goodwin when its FTSE 100 survival was only made possible by a massive taxpayer bailout. Still, the rename probably makes sense to investors based in England, with NatWest one of the best-known high street banking names.
Analysts are predicting a loss for the current year. So for NatWest at least, the suspension of FTSE 100 banking dividends almost certainly made sense — I’ve never been convinced by companies paying dividends when they’re not making the profits to justify them.
Unexpected profit
The bank surprised the markets by posting a Q3 profit Friday. NatWest reported an operating profit of £355m for the third quarter, against analyst expectations of a £75m loss. Impairments were better than expected too, with net impairment losses in the quarter of £254m.
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Chief executive Alison Rose spoke of “some positive trends across our customer base“. Customer deposits grew by £10.1bn to £418.4bn in the quarter, which is a welcome movement. Net lending increased too, by a fairly modest £0.4bn but definitely in the right direction.
Ms Rose did, however, add the caution that “the full impact of Covid-19 remains very unclear.” There’s nothing unexpected there, and the same is true of the whole FTSE 100. But the not knowing is itself contributing to the pressure on the NatWest share price. The big institutional investment firms, in particular, are very averse to uncertainty.
Worst-hit FTSE 100 sector?
Uncertainty is there across the whole FTSE 100, but the banking sector seems to suffer the worst. At least across the whole market, some sectors will prove more resilient than others. But when business as a whole is bad, the banking sector will inevitably suffer.
But I think the signs are that the sector will pull through the crisis without too much pain. And balance sheets across the business are looking stronger than feared. NatWest reported a CET1 ratio of 18.2%. The bank put that mainly down to a £7.6bn reduction in risk-weighted assets (RWAs), which itself looks like solid progress.
Looking forward, the bank now reckons its full-year impairment charge “is likely to be at the lower end of the £3.5-£4.5bn range.” That’s partly due to lower-than-expected defaults. Total RWAs are also now expected to beat previous guidance, coming in “below our previously guided range of £185-£195bn.”
What’s the valuation like?
What does this mean for NatWest as an investment? It’s hard to put a valuation on the shares at a time when the bank is only just expected to return to profit in 2021. But should earnings get back to 2019 levels in the next couple of years, we’d be looking at a P/E of under five on today’s share price. As it stands, 2021 forecasts put that multiple at 18 while we’re still in early recovery days. Meanwhile, there’s already a 3.7% dividend yield predicted for next year.
Investors have been buying, and have pushed the NatWest share price up 5% on the morning of these results. I’d put NatWest on my FTSE 100 buy list too.
