NatWest shares tipped to hit 10-year high in 2025
This high street lender provides exposure to well-performing UK banking markets without the motor finance issues affecting other players. Here’s why this analyst just raised their price target.
19th December 2024 13:14
by Graeme Evans from interactive investor
The latest bullish estimate of NatWest shares in 2025 has backed the lender to build on its success as one of this year’s strongest stocks in the FTSE 100 index.
Peel Hunt has increased its price target from 450p to 470p, up by almost a fifth on this afternoon’s level of 396p and compared with the 219p seen at the start of 2024.
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Earlier this month, JPMorgan placed NatWest Group (LSE:NWG) on positive catalyst watch with a new price target of 490p and Goldman Sachs reinforced its Buy position with an improved 523p.
Their upgrades reflect the support of higher-for-longer interest rates and the continued reduction of the government’s shareholding, which is now just below 10%.
Summing up the investment case, Peel Hunt said NatWest provided exposure to well-performing UK banking markets without the motor finance issues affecting other players.
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It added that an all-in yield of 12% for 2024, which is based on a 4.9% dividend plus buybacks, highlighted the capital-generative nature of the business.
The broker increased its earnings estimates for next year by 3.2% and for 2026 by 4.4%, which is based on modest increases in its assumptions for a higher net interest margin.
The elevated interest rate outlook since the Budget means that five-year swap rates used by lenders as a benchmark to price mortgages are likely to be above the level that informed management guidance at third-quarter results in late October.
The recent developments should be supportive for the yield on NatWest’s structural hedge, which lenders use to protect against interest rate volatility.
Banks hedge a proportion of their low interest-bearing liabilities, such as current accounts and instant access savings, by investing directly in longer-term fixed-rate assets or by using interest rate swaps. This provides a consistent and predictable revenue stream.
The results in October showed a strong third-quarter performance, with total income of £3.7 billion up 2.3% on the previous quarter and 7.3% higher than a year earlier.
The net interest margin of 2.18% was eight basis points stronger than the second quarter, while earnings per share of 14.1p showed a 0.4p improvement.
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Peel Hunt said today: “Momentum remains positive as NatWest is entering 2025 with earnings expectations supported by a rising structural hedge contribution.”
It notes that price/earnings multiples for 2024-26 are still well below 10 times, despite the continuing positive earnings momentum.
The City firm adds that the reduction of the government stake, including through November’s £1 billion directed buyback programme, is helpful for the rating of the shares.
The Treasury had owned 84% following the taxpayer bailout of Royal Bank of Scotland during the 2008-09 financial crisis.
The shares were 204p in November 2023, when former chancellor Jeremy Hunt announced a “Tell Sid”-style privatisation of the remaining stake of more than 20%. The plan was scuppered by July’s general election.
Graeme Evans owns NatWest shares.
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