Are NatWest shares worth buying from the Government?

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UK Chancellor Jeremy Hunt confirmed, in his budget statement, that the UK government would look to sell down its remaining stake in Natwest Group. So now seems the perfect time to look at the Natwest share price and whether or not you should invest when NWG shares are placed.

  • The government retains a 38.0% stake in the NatWest, a legacy of its 2008 bailout of, the then, Royal Bank of Scotland.
  • The Chancellor let it be known that the sale of the stake, which is currently worth circa £7.0 billion, would only take place if market conditions and sentiment allow.
  • In this analysis we look at whether or not NatWest shares are a buy, sell or hold.

Is it a good time to buy NatWest shares?

Leaving aside the moral question as to whether the UK taxpayer should be buying something they have already effectively bought and paid for. Is this the right time to buy shares in Natwest Group?

The bank has recently appointed a new permanent CEO in the shape of Paul Thwaite. A career banker, Mr Thwaite brings 30 years of experience to the role.

Which, he had previously held under a 12-month contract, following the departure of Alison Rouse, in the wake of the Coutts de-banking affair.

Mr Thwaite took charge of his first full year results as Group CEO, just over a month ago.

When the bank reported that it had 19.0 million customers: 17.80 million retail customers, 100,000 private banking customers and 1.50 million commercial and institutional customers.

The retail banking operations are the “jewel in the crown” generating £5.90 billion of income with a return on equity of +23.80%.

Returns in both private banking and its commercial operations are far lower at +14.80% and +15.40% respectively.

For 2023 the bank delivered attributable profits of £4.40 billion and declared a dividend of 17p. Up by +26.0% when compared to a year earlier.

The bank is targeting a 40.0% payout ratio to shareholders, by 2026, and suggested that it would have the capacity to fund stock buybacks should it choose to action them.

On the downside, costs rose to £7.60 billion, up by +5.0% compared to the full year 2022.

The bulk of the cost base is made up of staff and other admin costs. However, the bank is budgeting for a smaller rise in expenses in 2024.

Is NatWest undervalued?

In terms of performance, NWG stock has added almost +15.0% year to date, as the Bank of England refrained from cutting interest rates, which is beneficial for net interest income.

Whilst peers such as Barclays unveiled cost-cutting measures, that have helped to boost sentiment towards the wider sector.

Overall Natwest has been the best performer so far this year, among the UK names, in the FTSE 350 banks index.

In terms of valuation, a forward PE of 6.30 times earnings, a dividend yield of 6.80% and a price-to-book ratio of 0.59 times could hardly be called demanding.

However the question of valuation is not so much about these ratios, rather it’s about what the growth prospects for the business are, and where that growth might come from.

Once the bank is free from government ownership it may be that they explore new lines of business once again.

However, the bank spent the best part of a decade, dismantling overseas networks and foreign businesses. So it’s hard to imagine that it would actively pursue anything other than opportunities here in the UK, and those look pretty limited.

AI and associated technologies could help the bank to reduce costs and trim headcount over time. But it’s tempting to think that smaller, more nimble rivals will be better placed to exploit these opportunities than Natwest.

Even if Natwest can successfully deploy next-gen technology, to reduce costs, it’s debatable whether it can expand its UK retail business, to any great degree, from its current size.

Is NatWest a buy, sell or hold?

Natwest Group is rated as a moderate buy by City analysts, who have a 310.60p price target on the name.

It’s currently trading at 250p per share so it sits some -25.0% below that consensus price.

A 38.0% stock overhang is never a good look for a share price and it’s hard to imagine retail traders and investors will be queueing up to subscribe for stock, without a substantial incentive or discount being offered.

On the other hand, would the government want to discount its offer price, by say -30.0%? To attract retail and institutional investors alike to any sale of the state holding?

There is hardly a scarcity of stock either with some 27.0 million Natwest shares changing hands on average every day.

If you are an income investor and the government does discount the sale price in any flotation, then perhaps it would be worth maxing out your new British ISA allowance to pick up a yield above +7.0%.

Beyond that though I can’t see why you would buy Natwest shares in preference to its larger rivals, Barclays, Lloyds Banking, or other, high-yielders within the FTSE 100.

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