With the bank formerly known as RBS having amassed three years’ worth of ‘normal’ loan loss reserves against currently undefaulted loans, the FTSE 100 group is expected to begin returning this to shareholders in the form of dividends once regulatory curbs on dividends are lifted in the second half of 2021.
UBS expects the size of NatWest’s distribution will be around 15% of its £20bn market cap.
But after a near 50% rally in the share price over the past three months – “even as COVID infections reach record levels and the UK enters its third lock-down” – the share price valuation has reached “fair territory, we think”.
Income is what’s seen as more important for longer term value, . Near term we see pressure from low rates, particularly from the hedge, worth ~£400m p.a. in income, depressed customer activity from COVID lockdowns and lower NatWest Market revenues as conditions normalise and capital in the Rates business halves. We are 6% below consensus for income in 2021 and 12% below for pre-provision profit.
Seeing near term income forecasts below consensus, analysts at the Swiss bank downgraded their recommendation to ‘neutral’ from ‘buy’, adding that if continued price discipline is maintained in UK residential mortgage lending Barclays (LON:BARC) or Virgin Money UK (LON:VMUK) are “more attractively valued vehicles for that potential outcome”.
Meanwhile, Credit Suisse upped its price target for NatWest to 170p from 145p and kept its ‘neutral’ rating, while Morgan Stanley lifted its target to 210p from 200p and held onto its ‘overweight’ stance.
Banking analysts Credit Suisse and Morgan Stanley also hiked their targets for Barclays to 155p from 135p, and to 160p from 145p respectively, keeping their respective ‘neutral’ and ‘equal-weight’ ratings.
Upping their target to 1,570p and upgrading to ‘neutral’ after the shares “have finally de-rated”, with a 5% decline in the past three months since the Bristol-based company’s trading update while peers have climbed around 20%.
This means HL is now trading at 26-27 times 2021-2022 estimated earnings, in-line with the long-term average, the Citi analysts noted.
“We are still concerned about negative jaws in FY21 but after the de-rating risk-reward looks more balanced,” they said, adding that they expect net new business to recover in the second quarter on the back of the recent market rally.