NatWest FY preview: Where next for the NWG share price?

When will NatWest report FY earnings?

NatWest is scheduled to release its full year results for 2021 on the morning of Friday February 18.

NatWest FY earnings preview

NatWest kicks off earnings season for the Big Four banks listed in London, with its peers Lloyds, Barclays and HSBC all set to follow with results next week. Analysts are expecting a bumper earnings season driven by the improving economic picture and a rosy outlook thanks to the anticipated rise in interest rates in 2022, although this does not mean there are not challenges facing the industry this year.

The headline earnings measure to watch is operating profit, which is expected to come in at a healthy £3.96 billion in 2021 according to consensus numbers from Bloomberg, compared to the £351 million loss booked in 2020, when the pandemic severely hit results.

The attributable profit to shareholders is forecast to rise to £2.74 billion in 2021 from just £222.0 million in 2020, according to additional consensus figures from a NatWest-compiled consensus.

One reason earnings are expected to improve is loan provisions and credit impairments, which have been slowly unwinding as the economic outlook improves, allowing banks to reverse the large sums set aside for potentially bad loans during the pandemic. This is expected to provide a £940 million boost to earnings in 2021 compared to the hefty £3.24 billion drag seen in 2020.

That will help counter the bank’s tightening net interest margin, the core measure of profitability in the banking industry, which is set to contract to 1.46% in 2021 from 1.54% the year before. That is the result of low interest rates and rising costs, with NatWest suffering more than its some of its rivals that have vast investment banking divisions that have delivered bumper profits this year.

Instead, NatWest makes most of its money through its business and retail banking operations, supplemented by RBS International, Ulster Bank and its NatWest Markets division that serves corporate and institutional customers.

The contracting margin was the primary focus for investors when NatWest released its last set of earnings covering the third quarter, overriding the fact it beat expectations as the release of loan provisions boosted profits enough to beat forecasts. A disappointing performance from NatWest Markets, which swung deep into the red during the first nine months of 2021, also weighed on sentiment.

With profitability coming under strain, that has also highlighted the relative weakness in topline growth this year, which has fallen versus 2020. That is down to NatWest’s exposure to the likes of mortgages, which should slowdown as interest rates rise this year, and to small and medium sized businesses, where loan demand is still weak compared to other parts of the economy.

With that in mind, a tight control over costs is needed to keep the growth story alive. Higher interest rates and the recovering UK economy will aide NatWest this year, but weak topline growth forecasts and rising costs have investors nervous about profitability. That in turn weighs on sentiment went it comes to shareholder returns. Analysts currently believe NatWest can deliver a mild 5% rise in revenue in 2022 but expects operating profit to decline over 6.7% despite expecting its net interest margin to recover to 1.57% in 2022 as rates rise.

Turning to the balance sheet, NatWest is expected to have ended the year with a CET 1 ratio – which measures the financial strength of banks – of 17.9% compared to the 18.5% reported the year before. NatWest is aiming to return a minimum of £1 billion per year during the period covering 2021 to 2023 through a combination of ordinary dividends and special payouts, complimented by share buybacks.

NatWest paid out a 3.0 pence interim dividend in the first half of 2021 and launched a £750 million buyback programme that should have been completed before the end of the year. Consensus numbers from the bank suggest analysts are expecting a total ordinary payout for the year of 8.8p, supplemented by special dividends worth another 0.6p per share. Share buybacks are also expected to continue and will be closely-watched this week.

Where next for the NWG share price?

NatWest shares have been steadily recovering since being derailed by the coronavirus back in 2020 and buyers managed to push the stock above pre-pandemic levels earlier this month at 254p, marking its highest level since December 2019, before attracting sellers back into the market.

The share price has unsuccessfully tested this ceiling on three occasions in the last month alone, making it the key level to break beyond before it can start to eye higher ground. If the current uptrend that started in late November holds and the stock moves above 254p, then it can target 270p, which last emerged as a key level of resistance back in May 2018.

The current support being provided by the uptrend is largely in-line with the 50-day sma at 237p, which should act as an initial floor for the stock should the upswing lose momentum. A break below there opens the door to the 100-day sma at 230p but the 200-day sma at 218p should be treated as the ultimate floor for shares considering the stock has not traded below this moving average for over 15 months.

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