NatWest: state-backed bank is regaining its independence

UK banks are enjoying an unusually hospitable environment. The housing market is red-hot, the Bank of England is imposing back-to-back rate rises and the economy is strong enough for lenders to write back provisions made during the pandemic. NatWest demonstrated the benefits of all three on Friday, as it announced a rebound in net profits to £ 3bn last year.

The prospects for shareholders in the once-troubled lender are growing brighter. The bank is distributing £ 3.8bn of capital to shareholders for 2021. Taking that into account, its common equity tier one ratio – a measure of balance sheet strength – was 15.9 per cent against a target of 14 per cent. That implies plenty more distributions to come, with about £ 3bn of excess.

But NatWest suffers from historical baggage that will drag on shares even as rates rise further. Finalizing an exit from Ireland is the most immediate concern. So far, NatWest has sold 60 per cent of Ulster Bank’s assets in deals with Permanent TSB and Allied Irish Banks. Loan sales this year are due to incur losses of € 300mn. The bank has pencilled in additional withdrawal costs of € 600mn between 2022 to 2024, with € 500mn of this expected by the end of 2023.

Even so, NatWest is confident that return on tangible equity will be above 10 per cent in 2023. Shares have re-rated to match the better outlook. These have risen 31 per cent over the past year and now trade at 0.9 times tangible book value. That is near the top of their post-financial crisis range.

The second unhelpful legacy is the remainder of the government’s stake. NatWest spent £ 1.1bn buying back stock from its biggest shareholder last year. Expect the purchase of another government stock chunk when the window reopens in March.

The government makes its own share placements and market sales. The sell-off is accelerating. The state holding has fallen to 51 per cent from more than 60 per cent the year before. As the outlook for NatWest improves, the day when its largest shareholder can exit completely is coming closer.

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