On Friday, Citi reaffirmed its Buy rating on Natwest Group PLC (NYSE:NWG:LN) (NYSE: NWG), with a price target set at GBP3.35. Natwest Group announced the acquisition of retail banking assets from Sainsbury's Bank, which includes credit card, personal loan, and savings accounts. The transaction, expected to be completed in the first half of 2025, will introduce approximately £2.5 billion in assets and £2.6 billion in deposits to Natwest.
The acquisition is anticipated to have a 20 basis points impact on Natwest's Common Equity Tier 1 (CET1) ratio, a key measure of financial strength for banks. Despite this, the deal is projected to be accretive to earnings per share (EPS) and return on tangible equity (ROTE), although the earnings boost is expected to be minimal.
Citi's analysis suggests that the transaction, while relatively small compared to the overall operations of the Group, aligns with a strategic rationale. The firm notes that with Natwest's stock trading above tangible book value, the use of excess capital for this acquisition is seen as a preferable option compared to on-market buybacks, which are not expected to be pursued further internally.
The consolidation move by Natwest forms part of a broader trend within the UK banking sector, which has seen a series of consolidations throughout the year. The acquisition by Natwest represents a strategic effort to enhance its retail banking portfolio and utilize excess capital effectively. The completion of this deal is set to expand Natwest's asset and deposit base, contributing to its growth trajectory in the coming years.
In other recent news, NatWest Group has reported significant Q1 growth, showcasing a robust financial performance. The company's strategic initiatives have led to a sixth consecutive year of customer lending growth, reaching £361 billion, and an increase in deposit balances to £420 billion.
This has generated an income of £3.4 billion, resulting in a £1.3 billion operating profit and a 14.2% return on tangible equity. The UK government's stake in NatWest Group has also been reduced to below 29%, with plans for a complete exit by 2026.
In terms of future developments, NatWest Group is optimistic about its medium-term outlook, expecting a stable net interest margin and a return on tangible equity of around 12% for 2024, with goals to surpass 13% by 2026. The company also completed a £500 million on-market buyback program and is currently in the process of a £300 million buyback.
Despite potential challenges from upcoming rate cuts and the bank levy, NatWest Group's leadership remains confident in their ability to navigate the market and deliver value to shareholders. These recent developments continue to highlight NatWest Group's commitment to disciplined growth and efficient capital deployment.
InvestingPro Insights
As Natwest Group PLC (NWG:LN) (NYSE: NWG) gears up for its strategic acquisition of retail banking assets from Sainsbury's Bank, investors are keeping a keen eye on the company's financial metrics.
According to InvestingPro data, Natwest is trading at a P/E ratio of 14.34, which is considered low when paired with its near-term earnings growth. This is further underscored by an adjusted P/E ratio of 6.3 for the last twelve months as of Q1 2024, suggesting that the stock may be undervalued relative to its earnings potential.
Moreover, the company has demonstrated a strong return over the last three months, with a 26.91% price total return, and an even more impressive 55.42% return over the last six months. This robust performance is in line with Citi's Buy rating and indicates that the market is responding positively to Natwest's strategic moves and its potential for profitability, as analysts predict the company will be profitable this year.
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