NatWest: We Lift Our Fair Value Estimate and Award a Standard Capital Allocation Rating

After taking a fresh look at our model for NatWest, we increase our fair value estimate to GBX 360 per share from GBX 280 previously. The largest change in our assumptions has been our modelling of NatWest's net interest margin. While we previously assumed that NIM may have peaked in 2023 with a subsequent slow decline, we now believe that the structural hedge income at current swap rates will be able to more than offset potential headwinds on margins. The first quarter this year already displayed a material slowing of headwinds weighing on NIMs, a trend we foresee to continue over the coming quarters. We do, however, expect lower base rates set by the Bank of England to weigh on deposit margins in the second half of 2024 through 2025. As a result, we now model for a banking NIM of 300 basis points by 2027 after a trough of 285 basis points in 2025. Moreover, NatWest can comfortably maintain a 40% dividend payout ratio while also returning GBP 3.3 billion in share buybacks over the next three years while maintaining its common equity Tier 1 ratio within its target range between 13% and 14%. Our no economic moat rating is unchanged.