NatWest: Another Exceptional Quarter

seekingalpha07-31

Shares of NatWest have continued their strong run, outperforming the wider European financials space by around 17 points since my last piece back in May.The second quarter's results were impressive. ...

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W","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4207":"综合性银行","LYG":"劳埃德","EUFN":"欧洲金融指数ETF-iShares MSCI","NWG":"NatWest Group","BK4521":"英国银行股"},"translate_title":"NatWest：又一个出色的季度","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"EUFN":1,"LYG":1,"NWG":1},"content_text":"Shares of NatWest have continued their strong run, outperforming the wider European financials space by around 17 points since my last piece back in May.The second quarter's results were impressive. While provisioning drove much of the bottom-line beat, net interest income and pre-provision earnings were also stronger than expected.These shares aren't expensive if you accept management's medium-term financial targets, but with U.K. peer Lloyds at a similar valuation, I prefer it to NatWest at this point.Lubo Ivanko I did wonder whether NatWest stock (NYSE:NWG) had run its course when I last covered the bank back in May. It wasn't that a then-valuation of 1.1x tangible book value was expensive as such, but with the bank guiding for a circa 12-13% return on tangible equity (\"ROTE\"), these shares were as close to fair value as they had been for a long time, and this ultimately drove my downgrade to 'Hold'. That call was clearly premature. Not only have these shares continued their excellent run, outperforming European financials (EUFN) by around 17 points since then, but performance at the business level remains impressive, with the bank releasing another very strong set of figures in respect of Q2. This has led the bank to upgrade full-year ROTE guidance - not a complete surprise, given I thought management may have been sandbagging a little after Q1. Data by YCharts Prospective investors are left in an interesting place. Technically, increased ROTE guidance means the stock is now slightly cheaper than it was last time based purely on 2024 earnings. This is despite its multiple of tangible book value also increasing by around 0.1x in that time. Having said that, I am mindful that management has kept longer-term profitability targets in place, and that certain elements of current earnings are not sustainable. With 'Buy'-rated peer Lloyds (NYSE:LYG) trading at a similar multiple on higher medium-term profitability targets, I keep my rating for NatWest in place for now. Another Impressive Quarter NatWest has followed up strong first quarter results with an even more impressive print in Q2, with pre-tax income of £1.7 billion beating consensus by around £440 million. This mapped to a very strong return on tangible equity of 18.5%, an improvement on the 14.2% posted in the prior quarter and well ahead of the 13.4% pencilled in by analysts. Unsurprisingly, given their overlap, results for NatWest and U.K. peer Lloyds share much in common. Like Lloyds, NatWest saw Q2 earnings materially boosted by lower levels of provisioning, with a resilient U.K. economy driving a circa £45 million release. This was over £200 million ahead of the consensus charge expected by analysts and drove most of the bottom-line beat. Source: NatWest Q2 2024 Results Presentation Provision-driven beats tend not to be favored all that much by the market, and with the Q2 print mapping to a 5bps release, it is clearly not a sustainable source of upside for NatWest. Positively, pre-provision performance was also solid, with pre-provision operating profit of £1.65 billion clearing consensus by around 16%. Like Lloyds, operating expenses were arguably the weakest part of results, though core expenses only missed by around 0.6%. Unlike Lloyds, NatWest is seeing stronger net interest income (\"NII\") and margin (\"NIM\") performance. While NII was down around 2.5% year-on-year, deposit costs have now stabilized at around 2.1% while the group's interest-earning asset yield ticked up 8bps sequentially to 4.75%. This helped drive a sequential uptick in NIM, which at 2.10% was up 5bps quarter-to-quarter and 9bps ahead of consensus. Source: NatWest Q2 2024 Results Presentation NIM has further room to expand thanks to structural hedge dynamics. For new readers, the structural hedge is very similar to a portfolio of fixed income securities, which the bank can fund using eligible customer liabilities (like non-interest bearing demand deposits). Strictly speaking, this is achieved via receive-fixed interest rate swaps and not bonds, but the overall result is the same, with the bank partly shielding itself from interest rate swings by locking in a margin on these deposits. The size of the structural hedge is expected to reduce slightly from around £175 billion at previous coverage to £170 billion by year-end. On the flip side, five-year swap rates are somewhere in the 3.8-3.9% area right now, and this is materially higher than the portfolio's current redemption yields. This will provide a tailwind to NII over the medium term, even though the Bank of England is expected to begin reducing interest rates soon. Near-Term Guidance Raised Having earned a 14%-plus ROTE in the first quarter, I did think management may have been sandbagging a little when they maintained full-year ROTE guidance back in May. Second quarter earnings have since taken ROTE up past 16% for H1, and with that, the near-term outlook has also been raised, with ROTE now seen 'above 14%' this year versus 'around 12%' previously. Higher than expected revenue is a factor in this, as is reduced provisioning. The latter is not a sustainable source of upside here, and I would note that management has kept medium-term ROTE guidance in place. Having said that, even this 'greater than' 13% target is vague enough to encompass ongoing upside. Looking ahead, normalized levels of provisioning will eventually shift attention to cost leverage. NatWest's cost/income ratio was 55.5% in H1, and pre-results consensus has this falling to around 53% by 2026. Developments on that front will be something to keep a closer eye on going forward. Valuation NatWest ADSs trade for $9.64 as I type, which puts them at just over 1.2x second quarter tangible book value per share (\"TBVPS\"). This is up from roughly 1.1x TBVPS at previous coverage in May, albeit NatWest's earnings yield has actually increased here as near-term ROTE guidance has also risen. On that measure, this means the shares are actually cheaper now than they were back then. NatWest being a bank, I think it is better to value it on mid-cycle earnings potential instead. If you view management's 13%-plus longer-term ROTE target as credible, I think that would support a fair value multiple of around 1.35x TBVPS, with that based on a 10% cost of equity and 1% long-term annualized growth. That would get me to a 2-to-3 year target of price of around $13.40 for the ADSs based on consensus 2026 TBVPS, easily good for double-digit annualized returns for investors even without including dividends. That said, I would note that Lloyds currently trades for a similar multiple but with higher medium-term ROTE guidance of greater than 15%, so I think it is the better deal for prospective investors. Summing It Up  NatWest has continued its strong start to 2024, following up very good first quarter results with an even better Q2. These shares aren't expensive by any means based on sell-side consensus and management's medium-term targets; indeed, investors even have some wiggle room for underperformance. With that, I was probably premature in downgrading the bank to 'Hold' last time out. Even so, with peer Lloyds trading on the same multiple while targeting higher medium profitability, I prefer the latter at this point, and I keep my rating for NatWest in place.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2455718490"}