AI Investments Will Improve Operational Efficiency And Customer Satisfaction

Key Takeaways

• Return to private ownership could boost investor confidence and positively impact future revenue and profit.
  
• Strategic focus on digital transformation and simplification may enhance margins and operational efficiency.
  
• Potential rate cuts, operational challenges from acquisitions, and economic uncertainties could pressure NatWest's margins, impacting profitability and shareholder returns.

Catalysts

Provides banking and financial products and services to personal, commercial, corporate, and institutional customers in the United Kingdom and internationally.

• NatWest's anticipated return to private ownership by 2025 could unlock new growth opportunities and attract new investors, potentially boosting confidence and investor sentiment, impacting future revenue and profit positively.
  
• The strategic focus on disciplined growth and bank-wide simplification, including digital transformation and efficiency improvements, could enhance operating leverage and maintain or increase net margins.
  
• The acquisition of residential mortgages from Metro Bank and customer accounts from Sainsbury's Bank will likely provide additional revenue streams and expand the customer base, contributing to future earnings growth.
  
• Investment in technology and AI, alongside customer engagement enhancements, could improve operational efficiency and customer satisfaction, supporting sustained revenue growth and potential cost reductions.
  
• Increased dividend payout ratio to 50% from 2025 and ongoing share buyback activities may indicate confidence in future earnings growth, with positive implications for earnings per share and shareholder returns.

NatWest Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NatWest Group's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 30.9% today to 29.4% in 3 years time.
• Analysts expect earnings to reach £5.1 billion (and earnings per share of £0.64) by about March 2028, up from £4.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £6.1 billion in earnings, and the most bearish expecting £3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.0x on those 2028 earnings, down from 8.5x today. This future PE is lower than the current PE for the GB Banks industry at 8.2x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

NatWest Group Future Earnings Per Share Growth

Risks

• The anticipated Bank of England rate cuts could pressure NatWest’s net interest income if the pass-through to deposits is not managed effectively, potentially impacting revenue and earnings.
  
• Operational challenges from integrating acquisitions like Metro Bank’s mortgage portfolio and Sainsbury’s Bank accounts could lead to increased costs beyond the projected one-time integration expenses, affecting net margins.
  
• Future economic uncertainty and moderate growth forecasts may necessitate higher loan impairments than anticipated, which could dilute net margins and profitability.
  
• Despite strong current capital generation, increased regulatory capital requirements or potential Basel III implementation delays could constrain capital management strategies and reduce earnings.
  
• The potential shift in deposit mix and competition for deposits could strain net interest margins, reducing overall profitability and impacting shareholder returns.

Valuation

• The analysts have a consensus price target of £5.052 for NatWest Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £6.15, and the most bearish reporting a price target of just £3.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £17.3 billion, earnings will come to £5.1 billion, and it would be trading on a PE ratio of 8.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of £4.67, the analyst price target of £5.05 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.