Shares in NatWest Group PLC (LSE:NWG) were boosted by JPMorgan research suggesting the government’s exit from the shareholder register could be a little quicker than anticipated.
In a note, in which the American bank reaffirmed its “overweight” recommendation and 270p price target, JPM suggested potential regulatory changes could hasten the sell-off, which could be completed by next year.
Chancellor Jeremy Hunt in his Budget statement, said the plan was to complete the divestment between 2025 and ’26.
At its annual meeting, NatWest proposed increasing the maximum limit for directed share buybacks from the current 4.99% to 15% over a 12-month period, pending approval of proposed Financial Conduct Authority (FCA) listing rules.
This move is seen as a response to anticipated changes in listing regulations, offering NatWest more leeway to repurchase shares directly.
It’s estimated that the government’s current 30.98% stake in NatWest could be reduced to below 20% by the end of summer.
This reduction is expected to result from a combination of a directed buyback of approximately 5% in May, a potential retail share offering of 5-10% of shares, and the continuation of the trading plan.
Looking ahead, JP Morgan anticipates NatWest will conduct annual directed buybacks of the UK government’s stake of 5% in the second quarters of 2024 and 2025.
The primary limitation for these buybacks is seen as the common equity tier 1 (CET1) ratio, a key measure of a bank’s financial strength, which NatWest aims to maintain within the 13-14% range.
Given NatWest’s projected annual CET1 ratio growth of 120-140 basis points (bps) pre-dividends, there could be additional capacity for directed buybacks in 2025, assuming the bank meets profitability targets and manages its risk-weighted assets (RWA) growth to below 3%.
A successful divestment of the UK government’s stake in NatWest is expected to positively impact the bank’s valuation, which currently stands at 6.2 times price-to-earnings (PE) ratio and 0.7 times price-to-tangible net asset value (PTNAV), with a projected return on tangible equity (RoTE) of 12.4% in 2025.
JP Morgan reiterated its view of NatWest as the top pick among UK banks, given these potential developments.
In late afternoon trading, NatWest shares were up 3% at 253.1p.
