NatWest makes £1.6bn in Q2
Thanks to a booming mortgage market and an economic rebound, NatWest made a pre-tax profit of around £1.6bn in Q2. This was nearly £3bn more than the £1.3bn it lost in Q2 a year ago, when it set aside billions to meet Covid-19-related losses. The state-backed lender reversed £605m of previous credit impairments, which dropped straight into its bottom line. Thanks to government support programmes, bad debts and loan defaults came in far below predictions made 12 months ago. Despite this huge turnaround, the NatWest share price closed down 3.84p (1.9%) at 201.06p, valuing the former RBS at £23.3bn.
However, the bank’s revenues were flat quarter-on-quarter at £2.66bn in both Q1 and Q2 of this year. Encouragingly, earnings per share — a crucial prop for the NatWest share price — came in at 10.6p, more than double (+107.8%) the 5.1p of the first quarter. Then again, the bank’s net interest margin — a key measure of lending profitability — declined to 1.61% (from 1.64% in this year’s Q1 and 1.67% in H1 2020). Another key metric, return on tangible equity (ROTE), was 15.6% in Q2 this time (versus 7.9% in Q1 and -12.4% in H1 last year).
Dividends could support the NatWest share price
Good news from NatWest is also good for the UK, because HM Government (HMG) owns more than half (55%) of the bank’s stock. Hence, the group’s announcement that it would return more than £3bn to shareholders over the next three years should help to support the NatWest share price.
NatWest has announced an interim dividend of 3p a share, worth almost £350m across 11.6bn shares in issue. Also, it will pay a minimum of £1bn in cash dividends in each of the next three financial years. The bank also unveiled a £750m share buyback. This will reduce the number of shares in circulation, increasing the value of the remaining equity. Further buybacks could also be on the cards — good news for HMG, which plans to sell down its stake. Without these buybacks, government selling pressure might send the NatWest share price southwards.
What next for NWG?
The NatWest share price has been the best performer among UK bank stocks over the past year. It’s up 91%, almost doubling in 12 months. What’s more, the bank’s balance sheet is in rude health. Its common equity tier 1 (CET1) ratio — a key measure of financial strength — stands at 18.2%, far above the regulatory minimum. Also, if the UK economy keeps improving, the bank could have billions of spare capital to boost future shareholder returns (and the NatWest share price).
But three factors could undermine the current direction of the share price. First, the booming UK housing market is starting to cool down, following the return of stamp duty on purchases. Second, if UK economic growth slows or goes into reverse, then the group’s lending margins and profits could stumble again. Third, if more infectious and vaccine-resistant strains of coronavirus take hold, the global economy might crash again — and all bets will be off. I don’t own NatWest stock today, but after these solid results, I might well be tempted to. However, I’d prefer to see how H2 unwinds before pressing the Buy button!
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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.