The Chancellor’s upcoming initiative to launch a significant public sale of NatWest shares in the coming year, aimed at reducing the government’s nearly 40% ownership stake, increasing private investor participation in UK-traded shares, and revitalizing a somewhat sluggish London stock market, raises an important question for savers: should they consider participating in this offering?
Initially, investors need to assess whether NatWest aligns with their overarching investment objectives, be it capital growth, income generation, or a combination of both. They should also consider their investment horizon, desired return on investment, and their tolerance for risk, which essentially reflects their willingness and capacity to endure losses in pursuit of gains.
If the response to these criteria is predominantly positive or at least leans toward a favourable outlook, conducting further research becomes imperative. Conversely, if the assessment is negative, investors may opt to explore alternative opportunities. It’s essential to emphasize that this decision is inherently personal, as each individual’s circumstances and preferences will shape their judgment.
Subsequently, the investor should delve into an evaluation of the bank’s competitive standing, strategic direction, financial robustness, and the competence of its management. This task may prove somewhat more challenging in light of the recent controversy involving the former chief executive in the Nigel Farage “debanking” scandal. Nonetheless, these factors collectively play a pivotal role in determining NatWest’s potential for profitability over the long term.
All of these factors can also exert influence on the valuation that investors are willing to assign to a company’s shares. A stock representing a business with a reliable and predictable profit stream, coupled with a dominant position within its industry, a well-regarded management team, and a strong financial foundation, tend to command a higher price relative to its earnings when compared to one lacking these advantages.
NatWest operates within a fiercely competitive landscape, where both established industry giants and emerging fintech startups pose significant challenges. Furthermore, the economic trajectory remains uncertain, with the Office for Budget Responsibility’s latest growth forecasts offering little cause for excitement, and the Bank of England maintaining a cautious stance on interest rates.
The bank also faces potential constraints stemming from political, public, and regulatory pressures, which may impact “net interest margins” – the difference between what a bank pays depositors and charges borrowers. Additionally, the spectre of a recession looms, potentially leading to increased losses on non-performing loans and further denting earnings in the years ahead, particularly in 2024 or 2025.
Conversely, the United Kingdom continues to evade the looming threat of a recession, maintaining historically low levels of loan impairments. Despite the Bank of England’s occasional hints to the contrary, there is an expectation that interest rates will be reduced in the coming year. Furthermore, NatWest currently comfortably meets all regulatory capital adequacy requirements.
One could make the case that a significant portion of the negative developments may already be factored into the stock price, especially considering that the shares are trading at a substantial 25% discount compared to their most recent reported net asset value per share of 271p. With a multiple of forecasted earnings standing at less than five, it appears that investors have largely relinquished expectations of robust growth (analysts anticipate pre-tax income to hover around £4 billion over the next three years). However, the enticing yield of 8.4% could serve as a compensating factor.
Should there be a deeply discounted offering price, it could make NatWest shares even more appealing to income-focused investors or those seeking value opportunities. On the other hand, momentum investors seeking rapid capital appreciation or substantial growth may find more promising prospects elsewhere.
