With NatWest (LSE:NWG) shares up almost 100% over the last 12 months, it’s natural for investors to wonder whether that ship has sailed. But analysts at JP Morgan think there’s still an opportunity.
Their expectation is for market share gains, net interest income growth, and the UK government selling its stake to result in higher dividends. If they’re right, this could be a big opportunity.
Investment thesis
First and foremost, the outlook for NatWest – as well as the other UK banks – is positive. Net interest income is expected to grow by around 4.4% in 2025 (and JP Morgan thinks this might be conservative).
UK banks net interest income
| Barclays | Lloyds Banking Group | NatWest | |
|---|---|---|---|
| 2023 | £12.71bn | £13.77bn | £11.05bn |
| 2024 (est.) | £12.7bn | £12.94bn | £11.15bn |
| 2025 (est.) | £13.28bn | £13.44bn | £11.64bn |
Source: S&P Global Intelligence
In a better lending market, NatWest could also be in a stronger position than its peers. The firm has less exposure to car loans than Lloyds Banking Group or Barclays, giving it a stronger balance sheet.
Lastly, the bank is set to go back to being fully privatised later this year, for the first time since 2008. The UK government has reduced its stake to below 10% and is expected to divest this in 2025.
Once this happens, a change in dividend policy could be on the cards. Instead of returning 40% of its attributable profits to shareholders, this is expected to increase to 50%.
Putting all this together, JP Morgan is anticipating a dividend yield of around 7% per year from 2026, based on today’s prices. That’s something passive income investors should pay attention to.
I don’t think the NatWest share price is going to stay where it is if this happens. But investors who buy today could find themselves in a very nice position a couple of years in the future.
Risks
For the first time in a decade, NatWest shares are trading above the firm’s book value. That indicates investors are more positive about the outlook for the business than they have been over the last 10 years.
There is good reason for this – the UK government divesting its remaining stake puts the company in a position it hasn’t been in more than a decade. And that strength should – hopefully – be permanent.
Some of the other issues, though, are less certain. With the car loans investigation, the latest news indicates that the impact on Lloyds and Barclays might be less significant than anticipated.
In that situation, NatWest’s position compared to its rivals might not be strengthened in the way JP Morgan’s analysts are anticipating. So its growth could come in lower than expected.
Furthermore, lending margins across the board are likely to depend on what happens with interest rates over time. And the outlook for this is far from clear at the moment.
The Bank of England is facing a dilemma between keeping rates high and risking a recession or lowering them at the cost of inflation. In either situation, there could be challenges for NatWest.
Too cheap to ignore?
JP Morgan has a price target of £5 for NatWest shares – around 18% above the current level. And the UK government selling the last of its stake is clearly a long-term positive for the bank.
Even if the economic outlook is uncertain, a change in dividend policy could make the stock a very good source of passive income. So I think it’s definitely one for investors to consider.
