Digital Transformation And Sustainable Finance Will Drive Progress

Key Takeaways

• Accelerated digital transformation and cost rationalisation drive improved efficiency, stronger margins, and enhanced customer experience through technology, AI, and strategic partnerships.
  
• Leadership in climate and sustainable finance, along with expanding the customer base and capital returns, positions NatWest for above-average growth and robust shareholder value.
  
• Rising cost pressures, regulatory uncertainty, and challenging market dynamics threaten NatWest's lending margins, profitability, and growth amid increasing fintech and technology integration risks.

Catalysts

Provides banking and financial products and services in the United Kingdom and internationally.

• Ongoing digital transformation and adoption of AI-including the recent strategic collaboration with AWS and Accenture to modernize data capabilities-are driving further customer experience improvements and productivity, which is expected to lower NatWest's structural cost base and enhance net margins.
  
• NatWest's leadership and expanding targets in climate and sustainable finance (with a goal to deliver £200bn by 2030) position the bank to capture growing demand for ESG-compliant and transition finance solutions, supporting fee revenue and long-term loan growth.
  
• Continued focus on cost rationalisation-including accelerated branch optimisation, legal entity consolidation, and technology streamlining-is reducing the cost-to-income ratio (now at 49% and targeted to fall further), providing sustained improvement in net margins and overall earnings.
  
• The group's robust capital generation and return of surplus capital via a higher dividend payout ratio and ongoing substantial share buybacks (£1.5bn returned in H1, higher payout of 50%) support elevated earnings per share and total shareholder return.
  
• NatWest is broadening its customer base through both organic growth and acquisitions (e.g., adding 1 million customers via the Sainsbury's transaction), while expanding offerings in mortgages, SME and institutional banking-supporting deposit, lending, and fee income growth above sector averages.

NatWest Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NatWest Group's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 32.6% today to 28.9% in 3 years time.
• Analysts expect earnings to reach £5.1 billion (and earnings per share of £0.61) by about July 2028, up from £4.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £6.0 billion in earnings, and the most bearish expecting £4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 8.9x today. This future PE is greater than the current PE for the GB Banks industry at 9.6x.
• Analysts expect the number of shares outstanding to decline by 2.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

NatWest Group Future Earnings Per Share Growth

Risks

• The ongoing competitive intensity in core markets-including mortgage spreads tightening below the 70bps level and significant reliance on pricing discipline-could pressure lending margins if rationality in the market breaks down, resulting in sustained NIM (net interest margin) compression and impacting future earnings growth.
  
• NatWest's cost base, while currently well-managed, faces persistent upward pressure from wage inflation, national insurance contributions, and continued mandatory investments in technology, branch optimization, and bank levies; any failure of efficiency gains to fully offset these recurring and lump-sum costs could erode net margins over time.
  
• The UK's economic backdrop and financial system are described as "a little bit more challenging compared to the start of the year," and there is no explicit annualized guidance for lending growth; a potential cyclical slowdown or stagnant domestic loan demand may limit revenue and earnings growth prospects, especially as market saturation and fintech competition mount.
  
• Regulatory uncertainty around capital buffers-especially as CRD IV, Basel changes, and Pillar 2 requirements evolve-means that NatWest may need to hold higher nominal capital even if actual business risk does not rise, lowering return on equity and limiting distributions as regulatory clarity lags.
  
• Despite digital investments, legacy IT infrastructure and the need for ongoing major transformation and integration costs (including recent acquisitions like Sainsbury's Bank) present execution risks; delays or cost overruns in modernization efforts or failure to keep pace with fintech entrants could elevate operating costs and depress profitability.

Valuation

• The analysts have a consensus price target of £5.844 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 £6.5, and the most bearish reporting a price target of just £4.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £17.6 billion, earnings will come to £5.1 billion, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of £5.3, the analyst price target of £5.84 is 9.3% higher.
  
• 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.