On Friday, Goldman Sachs initiated coverage on Natwest Group PLC (NYSE:NWG:LN) (NYSE: NWG) stock, setting a Buy rating and establishing a price target of GBP 4.40. The firm's analysis highlights Natwest's current valuation as inexpensive, noting its trading at 7.3 times price-to-earnings (P/E) on a twelve-month forward (12MF) basis and at one times price-to-tangible book value (P/TBV).
The assessment by Goldman Sachs points to a robust earnings per share (EPS) growth forecast for Natwest, with an expected compound annual growth rate (CAGR) of 10% from 2023 to 2027, which surpasses the 7% average for the firm's coverage excluding UBS. The firm's outlook is particularly positive for the years 2026 and 2027, where their net profit estimates are 10% and 22% above consensus, respectively.
Goldman Sachs predicts that these years will become increasingly significant within their 12-month price target horizon. The firm projects a 16% average return on tangible equity (ROTE) over the period from 2024 to 2027 for Natwest. Additionally, they anticipate an average annual capital return yield of 13% from dividends and buybacks, which is higher than the sector average.
The financial institution is also expected to maintain a strong capital position, with a common equity tier 1 (CET1) ratio of over 13%. This ratio is a key measure of a bank's financial strength and is used to protect depositors and promote the stability and efficiency of financial systems around the world. Goldman Sachs' positive stance on Natwest is based on these financial metrics and growth forecasts, suggesting confidence in the bank's future performance.
In other recent news, NatWest Group had a robust financial performance in the first half of 2024, reporting an operating profit before tax of £3 billion and an attributable profit of £2.1 billion. The company's return on tangible equity reached a commendable 16.4%. The bank's recent developments include the acquisition of a mortgage portfolio from Metro Bank and a deal with Sainsbury's, contributing to its disciplined growth strategy.
NatWest also reported organic customer growth exceeding 200,000 and is making progress towards its £100 billion climate and sustainable funding target by 2025. The bank demonstrated confidence in its financial health and outlook by announcing an interim dividend increase of 9% to 6p.
The bank's future expectations include maintaining stable operating expenses, excluding bank levies and retail offer costs, and achieving a full-year income of around £14 billion, excluding notable items. It also projects a CET1 ratio between 13% and 14% by the end of 2025, with risk-weighted assets around £200 billion.
However, the bank expects two base rate cuts in the upcoming quarters, which are anticipated to impact growth. Despite this, the acquisition of a £2.5 billion prime mortgage portfolio from Metro Bank is expected to contribute positively in the second half of the year.
InvestingPro Insights
The recent analysis by Goldman Sachs aligns with several key metrics and insights from InvestingPro. Natwest Group's current P/E ratio of 7.05, as reported by InvestingPro, supports Goldman Sachs' assessment of the stock as inexpensive. This valuation is further reinforced by an InvestingPro Tip indicating that Natwest is "Trading at a low earnings multiple."
InvestingPro data shows a price-to-book ratio of 0.74, which corroborates Goldman Sachs' observation of Natwest trading at around one times price-to-tangible book value. The bank's strong financial position is reflected in its operating income margin of 40.78% for the last twelve months as of Q2 2024.
An InvestingPro Tip highlights that "Management has been aggressively buying back shares," which aligns with Goldman Sachs' projection of high capital return yield from dividends and buybacks. Additionally, the tip suggesting a "High return over the last year" is validated by the impressive 72.16% one-year price total return reported by InvestingPro.
For investors seeking more comprehensive analysis, InvestingPro offers 8 additional tips for Natwest Group, providing a deeper understanding of the company's financial health and market position.
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