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Investment Thesis
I take the view that NatWest Group (NYSE:NWG) can continue to see upside from here, on the basis of continued customer loan growth despite macroeconomic pressures.
In a previous article back in July 2022, I made the argument that while NatWest Group had been seeing a recovery over the past couple of years, higher ECL provisions across the Leisure segment and slowing mortgage demand could be potential risk factors.
Since then, the stock has ascended to a price of $5.96 at the time of writing:
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The purpose of this article is to assess whether NatWest Group has the ability to see continued growth from here taking recent performance into consideration.
Performance
When looking at the most recent earnings results for NatWest Group, we can see that while net interest income was down slightly on a quarterly basis – the same saw growth of 32% on a half-year basis.
NatWest Group Interim Results 2023
Over the past two years, higher inflation has led to an increase in interest rates globally – which has significantly changed the landscape for commercial banks.
I had previously pointed out that while the growth in net interest income is encouraging, there is also the risk that inflation and accompanying rate rises could also lead to a decrease in loan demand and hence a stalling in net interest income growth.
However, this has not been the case. When we look at growth in loans to customers versus that of bank deposits since 2020, we can see that loans to customers has seen significant growth over this period, while bank deposits are at a similar level to that seen in 2020.
Loans to customers
Figures sourced from historical NatWest quarterly Excel data. Heatmap generated by author using Python’s seaborn library. Figures provided in £m.
Customer deposits
Figures sourced from historical NatWest quarterly Excel data. Heatmap generated by author using Python’s seaborn library. Figures provided in £m.
When comparing Q1 2020 to Q2 2023, the ratio of customer loans to bank deposits has seen a slight decrease from 0.91 to 0.86. With that being said, it is also notable that the absolute value of customer deposits has fallen this year, while loans to customers has seen growth.
This is an indication that loan activity has continued to see growth as a result of higher interest rates. Should this trend continue, then I take the view that the stock could see further upside from here.
I had also previously pointed out the risk that higher ECL provisions across the Leisure segment might be a risk factor for NatWest, on the basis that continued inflation could lead to a flattening of demand across this sector.
However, when we compare ECL provisions from Q1 2022 to H1 2023, we can see that provisions for this sector have fallen significantly:
Q1 2022
| Industry | Total ECL Provisions (£m) | Percentage (%) |
| Airlines and aerospace | 44 | 5.25% |
| Automotive | 48 | 5.73% |
| Health | 93 | 11.10% |
| Land transport and logistics | 81 | 9.67% |
| Leisure | 401 | 47.85% |
| Oil and gas | 51 | 6.09% |
| Retail | 120 | 14.32% |
Source: Figures sourced from Q1 2022 Interim Management Statement. Percentages calculated by author.
H1 2023
| Industry | Total ECL Provisions (£m) | Percentage (%) |
| Agriculture | 94 | 11.24% |
| Airlines and aerospace | 22 | 2.63% |
| Automotive | 51 | 6.10% |
| Chemicals | 4 | 0.48% |
| Health | 98 | 11.72% |
| Industrials | 50 | 5.98% |
| Land transport and logistics | 50 | 5.98% |
| Leisure | 230 | 27.51% |
| Mining and metals | 5 | 0.60% |
| Oil and gas | 33 | 3.95% |
| Power utilities | 32 | 3.83% |
| Retail | 148 | 17.70% |
| Shipping | 6 | 0.72% |
| Water and waste | 13 | 1.56% |
Source: Figures sourced from NatWest Group Interim Results H1 2023. Percentages calculated by author.
My Perspective
As regards my take on the above results and the implications for the growth trajectory of the stock going forward, I am impressed at the fact that:
- Loans to customers has continued to see growth in spite of rising interest rates.
- ECL provisions across the Leisure sector have fallen significantly.
When looking at price to book ratios as well as return on equity – NatWest currently shows similar results to its peers and I take the view that the stock is fairly valued at this point.
Price to Book
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Return on Equity
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With that being said, I take the view that NatWest can continue to see further upside from here if loan growth continues – I am optimistic that this can happen given the resilience of loan demand to interest rate rises.
Risks
In terms of the potential risks to NatWest Group at this time, I take the view that the primary one is macroeconomic-based.
With the UK economy shrinking by more than expected in July (0.5 percent as compared to a prior expectation of 0.2 percent) – the fear that the Bank of England is moving too aggressively with interest rate rises could dent consumer confidence.
In this regard, should we see a lack of growth in loan demand due to this – then the stock could see short-term downside.
However, I am cautiously optimistic that NatWest can continue to see growth from here – given that loans to customers has continued to see growth despite macroeconomic pressures.
Conclusion
To conclude, NatWest Group has seen strong growth in loans to customers despite macroeconomic pressures, and the bank is not as exposed to credit risks across the Leisure sector as previously. Taking these factors into consideration, I take a bullish view on NatWest Group.
