NatWest shares surge as dividend investors receive major boost

The cash-rich bank has cemented its place as the City's favourite lender with some great news for income seekers and reassuring half-year results.

Continued progress at NatWest Group (LSE:NWG) has left the bank awash with cash, which has resulted in a bumper return for shareholders.

The interim dividend increase takes the ordinary projected yield to 4.8%, and with the special dividend of 16.8 per share, the yield is turbocharged to around 12%. In addition, the bank intends to continue this elevated level of returns while not discounting further share buybacks or even acquisition opportunities should they arise.

Coupled with the intention further to reduce the government stake of 48%, there is much demand on the bank’s capital, which it is comfortably able to provide at these levels.

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Quite apart from the strength of the capital position, NatWest has also distanced itself from its peers by announcing a net release of £18 million for the half-year (or £46 million in the so-called “Go-Forward Group”), at a time when the other UK banks are returning to impairment provisions given a weakening economic outlook.

NatWest, for its part, maintains that there are no emerging signs of stress among its customers, who are generally continuing to build individual war chests ahead of what could be a tough winter.

At the same time, loan growth of 2.6% to £9 billion has been largely propelled by further growth in retail mortgages, despite headlines which might have been suggesting otherwise over recent months. Alongside a generally rising interest rate environment, traditionally positive for the banks, the Net Interest Margin (NIM) has made more progress and currently stands at 2.72%, up from 2.46% in the previous quarter. 

Most of the other key metrics are also driving ahead, with revenues and profits ahead of expectations. Half-year operating profit rose by 31%, underpinned by income growth of 16%, while Net Interest Income increased by 15%. The strength of the balance sheet has enabled today’s announced largesse, with a capital cushion of 14.3% and a Liquidity Coverage Ratio of 159%. The cost/income ratio has also markedly improved to 58% from 68% despite the distributions and planned further investment into the group’s development.

Another metric which separates NatWest so far is a Return on Tangible Equity figure, which has increased over the period to 13.1% from a previous 11.7%. In terms of outlook, the figure is expected to increase further to between 14% and 16%, with the NIM and CET1 ratio expected to stay at current levels.

Amid all the progress, there are some challenges on the near horizon, not least of which is the potential for further UK economic deterioration.

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NatWest remains committed to keeping close to any worsening trends, however, and in the meantime continues to increase prudent lending against the backdrop of a robust balance sheet. The government stake will continue to overhang the shares, although the direction of travel is becoming established in reducing the 48% holding further.

The elements which have differentiated NatWest from its peers have also been reflected in a uniquely positive share price performance, as evidenced by numbers which have clearly delighted investors.

Even prior to today’s surge, the price had risen by 14% over the last year, as compared to a gain of 3.8% for the wider FTSE100. Nor has this return diminished investor appetite, with the market consensus of the shares not only remaining at a "strong buy" but also maintaining the position of NatWest as the preferred play in the sector.