NatWest is back in the spotlight in the run-up to its 2021 results on February 18, not least because the government is on the verge of cutting its stake in the bank, a legacy of the 2008 financial crisis, from a peak of 79 per cent to below the psychologically important 50 per cent. The steady trickle of NatWest shares from the Treasury on to the stock market has dampened the price, but glasses will be raised in the boardroom when the government’s stake falls below the level of automatic control.
With that box ticked, the annual results will cleanse the balance sheet of a few nasty one-off charges. The bank will have released about £1 billion set aside for Covid loan losses that did not materialise. And last month it learnt that its fine and costs for breaching money-laundering regulations over Fowler Oldfield, the Bradford-based jeweller, totalled £270 million, rather than the £340 million that had been feared.
Alison Rose, the chief executive, has had a turbulent tenure so far. Her first results announcement in February 2020 was fractionally too early to merit any mention of Covid. Instead, attention was drawn to her decision to scrap the tarnished Royal Bank of Scotland name in favour of NatWest. Her agenda then was focused on social and environmental change and the bank was prominent in last November’s Cop26 climate change conference by pledging the end of loans to coal firms. However, as Britain’s biggest lender to companies, deriving more than 90 per cent of its income from this country in 2020, it has had its hands full with more basic priorities. By October of that year Rose was forced to admit that “the full impact of Covid remains very unclear”.
The forthcoming results season will be a chance to reassess UK-quoted banks. All are cash-heavy after pandemic roadblocks and the Bank of England ban on dividends in 2020, but, with the help of growth in lockdown-swollen customer deposits, NatWest has more spare money than most, about £80 billion over the minimum requirement. Excluding UK government support schemes, personal lending has been muted, except for mortgages.
That leaves NatWest nicely primed for an economic pick-up and the associated increases in the Bank of England’s base rate expected this year. After December’s much-delayed move from 0.1 per cent to 0.25 per cent, analysts are looking for another rise to 0.5 per cent this spring and a possible 1 per cent by the end of 2022. That would attract more savings, creating capacity for more loans at rates already routinely around 8 per cent for individuals.
Eyes will be peeled to see if NatWest has begun this year with an improved net interest margin, the key difference between the interest it pays on deposits and what it charges on loans and the like. At the end of September its 1.54 per cent margin was the sector laggard. If it has hauled that back to the 2.06 per cent of a year ago, it will be better-placed to make the most of higher interest rates and revived post-Covid activity.
Deutsche Bank sees NatWest as the most rate-sensitive UK bank because of its £80 billion excess capital, which therefore offers the highest potential return. Its 12.45 price-to-earnings ratio is at the top end, but so is its 2.4 per cent dividend yield. The bank is committed to paying an average £1 billion a year, 3.27 per cent of the present market capitalisation, in ordinary and special dividends for the next three years. The shares have more than doubled to 254p since the March 2020 Covid shock, but four years ago they were above 300p, Deutsche Bank’s target for them. They should have further to go.
ADVICE Buy
WHY After surviving difficult trading conditions, NatWest looks best placed to take advantage of the post-pandemic outlook
Hotel Chocolat
Maple and pecan, raspberry and pistachio — no wonder Hotel Chocolat’s mission is “making people happy through chocolate”. Angus Thirlwell, the company’s co-founder and guiding light, is ringing the changes on flavours, to tasty effect.
He delivered a bullish trading update yesterday, saying that second-quarter revenue was 37 per cent higher than the year before and 62 per cent up on the pre-Covid quarter two years ago as customers traded up to bigger boxes of more luxury chocs. Half-year sales were ahead by 40 per cent and 56 per cent, respectively.
“All our growth drivers are behind the acceleration in sales,” Thirlwell said, pointing to its Velvetiser in-home drinks system, VIP Loyalty rewards and digital, while also name-checking the United States, global wholesale and the company’s joint venture in Japan.
By any normal yardstick, the shares are ridiculously expensive. The 515p share price is supported by earnings per share of a tiny 4.5p for the financial year to last June and the first half of the present year suggests that may grow to only about 6.3p this time. So a historic 114 price-to-earnings ratio probably will fall only to a stratospheric 81 or so when the 2021-22 results are published in the autumn. And there’s no suggestion of a dividend.
On similar grounds, this column advised avoiding the shares two years ago because they seemed too expensive. They were 330p then, so may be one of those cases that defy gravity and the usual financial yardsticks, for a while at least.
Much of the recent growth stemmed from online spending as lockdowns restricted other opportunities, which will not continue indefinitely. However, the company has sound expansion plans in its main British, American and Japanese markets, with the long-term prospect of spreading to new territories. However, with such success come threats: one day competitors will nibble on its recipe.
Much hangs on the half-year numbers that are due on March 2. The share price has fluctuated either side of 500p since October. However, Peel Hunt analysts think that 600p is a fair prospect.
ADVICE Hold
WHY The expansion plans have further to go
