NatWest earnings: Loss of £351m will exit Ireland but reinstates dividend
Updated: Jun 13, 2021
"NatWest formerly the Royal Bank of Scotland ended the final quarter of 2020 with a loss of £351m ($490m) exit the Republic of Ireland following a strategic review but it will reinstate its dividend, so is it time to buy?"
Key Dividend Takeaways:
NatWest announced it will pay out a final dividend of 3 pence per share for a total of £364 million.
Pledged to increase shareholder returns by distributing at least £800 million per year for 2022 to 2023.
Note: The Bank of England made a decision in December to lift a ban on dividends and buybacks during the COVID pandemic, however the size of dividends and buybacks has been capped for now.
By Allan R. Kirby
NatWest formerly the Royal Bank of Scotland ended the final quarter with a loss of £351m ($490m) but has plans to reinstate its dividend and will exit the Republic of Ireland following a strategic review. Overall the bank booked a total impairment loss of £3.2 billion for the year to cover an expected increase in bad loans which so far has not occurred.
Full Year Financial results
Operating loss of £351 million and an attributable loss of £753 million. Q4 2020 operating profit before tax of £64 million and an attributable loss of £109 million.
Net impairment losses of £3,242 million, or 88 basis points of gross customer loans, resulted in an expected credit loss (ECL) coverage ratio of 1.66%.
In comparison to 2019, income across the retail and commercial businesses, excluding notable items, decreased by 10.0% as the lower yield curve, subdued business activity, and lower consumer spending was partially offset by strong balance growth.
Bank net interest margin (NIM) of 1.71% decreased by 28 basis points compared with 2019. Q4 2020 Bank NIM of 1.66% increased by 1 basis point in comparison to Q3 2020 as lower average central liquidity and improved asset margins more than offset reduced structural hedge income as a result of lower swap rates.
A cost reduction of £277 million was achieved during 2020, ahead of our £250 million target for the year.
Alison Rose, Chief Executive Officer stated that "The past year presented some extraordinary challenges for our customers, colleagues, and communities. We provided exceptional levels of support to those who needed it, including the approval of over £14 billion of lending under UK Government schemes, demonstrating that we have truly put Our Purpose at the heart of this business. Being purpose-led isn't just the right thing to do, it has a powerful commercial imperative and is fundamental to building sustainable value in our business. Alison also added that "We have today announced our intention to pay a final dividend whilst reaffirming our commitment to regular capital returns for shareholders in the future."
Controversial exit from the Republic of Ireland
The bank will exit the Republic of Ireland following a strategic review, and sell 4 billion euros ($4.84 billion) worth of loans from its Ulster Bank business to another bank, Allied Irish Banks This did not sit well with officials who are concerned with shrinking competition as well as the fact that Ulster Bank has served Ireland for more than 160 years and is the country's third-largest lender.
Is NatWest a good stock to buy (NWG)?
As I had mentioned in another article Natwest Group along with other banks such as Barclays is well off its 52-week lows but could still have a lot of room to appreciate. Natwest will easily survive the pandemic and may in fact come out even stronger than before. Tough decisions are being made such as cutting jobs, exiting markets, and investing in technology to improve efficiencies is helping NatWest's bottom line. Unfortunately shutting down Bo their digital-only bank highlights the challenges the bank has to take on more tech-savvy customer-centric entrants such as Monzo and Revolut. But on the positive NatWest's Mettle, a standalone digital-only business bank focused on small business has shown it can compete in the digital age, albeit a niche service.
NatWest is considered a deep value stock trading below book value but has taken steps to become a modern highly efficient bank that will be able to return capital to shareholders over the long term. The share price has recovered but it's very possible for this stock to continue to appreciate in value once the pandemic is over and Brexit is completely resolved. The return of the dividend is a huge positive and one that makes this stock worth buying if payouts continue over the coming year.
Finally, we also expect the return on tangible equity (RoTE) will greatly improve over the next few quarters, RoTE is a critical way to measure the profitability of a bank, because its a way to measure how effective a bank is at generating profits from its equity, the money invested by its shareholders. We believe NatWest does need to get at least 10% and preferably up to 12% over the long term to make this stock a good longer-term investment. This will mean continued cuts in staffing, closing branches, and investing in technology.
Do your own research and see if NatWest is a stock to add to your portfolio.
Stocks to buy is a segment of the MySmallBank.com blog written by Allan R Kirby, who writes and produces Personal Finance articles and videos.
Disclosure: mysmallbank.com nor the author received any compensation from any security mentioned in this article. The article is our opinion only and is written to help readers learn more about the stock mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.
The author does have a position in (NWG).