NatWest shares jump 5% as bank raises operating forecasts after strong Q3 results

NatWest (LSE: NWG) shares rose 5% as markets opened this morning after positive Q3 results that beat estimates. At £3.80, the price is now the highest since mid-2015.

With a 26% increase in third-quarter profits, the results reflect strong financial performance. The bank saw a slight decline in net interest income due to lower interest rates. However, it offsets this with cost control measures and strong asset quality, leading to better-than-expected revenue growth.

Operating profit before tax was expected to reach £1.5bn but it gained £1.7bn, up from £1.3bn last year. Subsequently, the bank raised its forecast for return on equity (RoTE) from 14% to 15%.

It also raised its annual revenue forecast by 2.8%, from 14bn to 14.4bn, citing slower-than-expected interest rate cuts.

Its loan impairment charge increased from £229m in Q3 2023 to £245m this quarter.

The investment case

NatWest is the UK’s fourth largest bank by market-cap, focusing on retail and commercial banking. The share price has declined in 2023 due to ongoing macroeconomic challenges such as rising inflation and interest rates.

But things have improved significantly this year, with the share price gaining more than 100% since late October 2023. Naturally, its dividend yield has fallen slightly in line with growth. However, it is still at a good 5%, which gives the stock a good combination of income and growth potential.

Since the dividend was reinstated in 2019, it has increased from 5.5p to 17p at an average rate of 26% per annum. The current price-to-earnings (P/E) ratio is 7.5, which suggests the stock may be undervalued but may also reflect uncertainty about earnings growth.

Return on equity (ROE) is 12.28%, indicating strong profitability.

The danger is still there

NatWest is still recovering from a government bailout in 2008, back when it was still under the RBS name. The continuing effects of the bailout made it difficult for the stock to find favor with investors.

Since 2008, the government has managed to reduce its share from 84% to 16%. With operational improvements, it will likely reduce this completely in the coming years, giving the bank more freedom to pursue investment opportunities.

This July it also revealed plans to buy a £2.4bn mortgage book Metro Bankwhich increases its exposure to the real estate market. All of these factors may introduce price volatility.

In addition to this, NatWest is facing economic conditions. Rising interest rates and inflation are impacting both its lending portfolio and customer behavior. Not to mention the oppressive regulatory environment in the UK which has grown more stringent this year.

My thoughts

After selling my shares in August, NatWest is now the only big four UK bank I don’t own a share in. On reflection, the sale may have happened sooner. Looking at today’s data, it looks like it may have more growth potential than I expected.

Since my portfolio is heavily weighted towards the financial sector, I do not plan to buy any more stocks today. But I might go back to NatWest later – it depends HSBCRemodeling plans are coming out!