After a lost decade, is it finally time to invest in the UK’s last bailed-out bank?
Recent results from Natwest (LON:NWG) (formerly RBS) suggest to me that there are some clear attractions here, despite the risks posed by rampant inflation and a possible recession.
Stockopedia’s algorithms seem to share this view. NatWest is also a member of Ed’s 2022 NAPS portfolio – you can find his January write-up here.
To find out more I’ve decided to take a deeper look at NatWest in this week’s article.
A good story?
Subscribers who have followed the progress of my rules-based SIF portfolio will know that I am very much a systematic investor. My choices are governed first-and-foremost by the numbers.
However, despite my fondness for data, I’m still keen to understand the story behind a stock. In the case of UK banks, I think the story is unusually simple and compelling right now – although as with all good tales, there is a possible plot twist at the end.
After a decade of ultra-low borrowing costs and abundant money, the Bank of England is raising interest rates as fast as it dares.
For a whole generation of investors, this is a brave new world. Many have never known rising rates. However, for the big banks, I think rising rates could herald a glorious return to form.
Near-zero rates forced banks to cut their net interest margins in order to remain competitive in the UK’s mortgage market. A bank’s net interest margin (NIM) is the difference between the interest it pays on deposits and the rate it earns on lending.
Savings rates couldn’t go below zero, but mortgage rates had to come down. Hence the squeeze. Rising interest rates are now allowing mainstream lenders like NatWest and Lloyds to expand their net interest margins.
NatWest’s NIM rose by 0.24% to 2.59% during the first half of this year, “driven by the impact of base rate rises”. A 0.24% increase is pretty huge, when you consider that the group has net lending of £362bn.
The increase in NIM drove a 20% increase in total income (revenue) to £6.2bn. Although higher costs limited profit growth, adjusted return on tangible equity rose from 12.8% to 14.1%.
The risk,…
