This is a sparkling set of numbers by any standards, as NatWest (LON:) continues the relentless recovery from its historic woes.
As far as investors are concerned, NatWest is in a sweet spot. The government shackles have gone, the group has prodigious amounts of cash, and acquisitions to boost growth further are playing out.
Indeed, this newfound freedom has already enabled a more aggressive acquisition policy, with NatWest having previously made what it described as two significant purchases in the form of Metro Bank’s mortgage book and Sainsbury’s Bank, both of which it would appear have been integrated seamlessly.
In addition, while the £2.7 billion purchase of Evelyn Partners earlier this week has had mixed reviews, given some questions being asked around the price paid, there is little doubt that the acquisition will lift the Private Banking and Wealth Management business to another level.
The performance in the final quarter capped off a fine year for NatWest, enabling the group to beat its own upgraded guidance as estimated in October. Total income of £16.64 billion was 13.2% ahead of the previous year, in excess of the group’s guided £16.3 billion and market expectations for £16.5 billion.
Operating pre-tax profit of £7.71 billion was 24.4% ahead of the corresponding period and comfortably beat estimates of £7.49 billion. Within its three main units, operating profit rose by 28% to £3.12 billion in Retail Banking, by 49% to £394 million in Private Banking and Wealth Management, and by 13% to £4.06 billion in Commercial & Institutional.
Revenue generally was boosted by loan growth, higher customer balances, and structural hedge income. Lending increased by £20.7 billion over the year and deposits by £10.4 billion, with customer impairments of little concern. NatWest had previously described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain, and levels of default overall remain low and stable.
The cost/income ratio is the star performer within the key metrics, with a drop from 53.4% to 48.6% representing a sector-beating number as the group reaps the benefits of simplification, technology-enabled digitalisation and a more agile business as a result. Elsewhere, other metrics also reflected strong progress, with a Return on Tangible Equity (ROTE) of 19.2% against 17.5% in the corresponding period, a capital cushion or CET1 ratio of 14% and an increase from 2.13% to 2.34% in Net Interest Margin.
The outlook targets for NatWest are stretching and reflective of the group’s expectation to enter the next couple of years from a position of strength. In the year to come, the bank is expecting total income to grow to within a range of £17.2 billion to £17.6 billion, with a ROTE of more than 17%. For 2028, ROTE is expected to improve further to more than 18%, with a targeted cost/income ratio of less than 45%, which looks achievable from its current position.
NatWest’s significant cash generation provides an interesting dilemma on whether to continue to bolster shareholder returns (another share buyback programme of £750 million was previously confirmed), make further acquisitions, invest heavily in the business, particularly in regard to growing digitalisation, or perhaps a combination of all of these options. There is little for the bears to feed on from these results, while investors have been handsomely rewarded in the recent past.
Over the last year, a 32% hike in the share price compares to a gain of 19% for the wider , which in turn has contributed to a rise of 186% over the last two years. The projected dividend yield of 5.5% is another strong attraction amid the group’s generous shareholder returns programme and the market consensus of the shares as a buy continues to push Barclays hard to become the preferred play in the sector.