Still plenty to like in NatWest's annual results

A strong final quarter to the year ensured a solid set of full-year numbers from NatWest Group (LSE:NWG), although there was little to fuel the fire which has resulted in stellar share price gains over the last year.

Indeed, there is an element of a different day, but the same story after Barclays (LSE:BARC)’ shares fell despite a perfectly respectable set of numbers yesterday. There is little within NatWest’s results to set any alarm bells ringing, but by the same token there is also little to add to the excitement of the last few quarters.

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At a group level, pre-tax profits of £6.2 billion were 0.3% ahead of the previous year and also higher than the expected £6.1 billion, fuelled by a fourth quarter which saw an improvement of 12.7% to £1.56 billion. Revenues marginally dipped to £14.7 billion for the year, although the figure was above estimates, with the decline mitigated by a hike of 8.1% to £3.8 billion in the final quarter.

Indeed, the so-called structural hedge, which lessens the group’s susceptibility to changes in interest rates and which many consider will be of particular benefit to NatWest, is also beginning to reap some further income rewards. Net Interest Income was 2% ahead at £11.3 billion for the year, and 12.5% up at £3 billion for the quarter.

Also playing into the growth were the twin benefits of higher loans, but also higher deposits. The latter had been the source of some concern for the high street banks as customers sought higher savings rates elsewhere and even now there is some evidence of locking in higher rates (and therefore lower margin to the bank) in anticipation of further interest rate reductions over the coming months. Even so, deposit margins rose, while net loans to customers increased by 3.6% to £12.9 billion, driven largely by a boost from its Commercial & Institutional business, which accounts for 54% of overall income and is therefore a major provider of group revenues.

Retail banking is the other large unit, responsible for 38% of group income, which was further boosted by higher mortgage balances. In addition, the strategic acquisitions of the retail assets and liabilities from Sainsbury’s Bank and the residential mortgages business from Metro Bank Holdings (LSE:MTRO) should help to accelerate further growth.

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Unsurprisingly most of the key metrics provided a reassuring tone, in particular a Return on Tangible Equity of 17.5 for the year, leading to an upgraded guidance for next year between a range of 15% to 16%, which seems both conservative and achievable in the current environment.

Elsewhere, a capital cushion of 13.6% is comfortably in range and ahead of 13.4% in the corresponding period, while Net Interest Margin (NIM) of 2.13% is a slight improvement on the 2.12% of the previous year. The cost/income ratio is also on a generally improving trend, even though the year end number of 53.4% represented a slight increase on the 51.8% achieved last year.

In terms of shareholder returns, there is some disappointment at the lack of an announcement regarding a share buyback, although an increase to the dividend was higher than expected and leaves a projected yield of 4.9%, which is potentially the main focus for the group, although it will reportedly consider further buybacks in due course. There is also the possibility that NatWest is keeping its powder dry as it aims to eliminate the government’s remaining stake of 7.98% entirely, which is expected to happen this year. From an initial peak some years ago of around 84%, the reducing stake progressively reduces the technical overhang on the stock, which has been a headwind for many years. 

Elsewhere, there are some minor potential blots on the landscape, but these are containable within the context of the group’s overall strength. Some early signs of strain at the corporate level have resulted in the bank making a precautionary addition to its impairment charge, bringing the yearly total to £359 million, although this level is significantly lower than the previous year. In addition, NatWest has 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.

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The share price dip at the open does little to mar a quite stellar price performance over the last year, with the shares having added 114% as compared to a gain of 16% for the wider FTSE100. Leading into these results, the shares had already added 9% in this calendar year following a period in which NatWest has become the focus of strong investment attention.

While Barclays has a marginal edge as the preferred play in the sector at present, the market consensus of NatWest also comes in at a strong buy and today’s minor reset may even provide a tempting buying opportunity for some investors.