Natwest Group Plc

Natwest Group Plc (LON: NWG) is the FTSE 100 listed Company, which provides banking products and financial services. The Group was earlier named as Royal Bank of Scotland Group Plc.

The Company will declare its full-year FY20 results on 19 February 2021.

Investment Highlights - Natwest Group Plc – Avoid at GBX 157.45.

• The total income from Retail Banking, Ulster Bank Rol and Commercial Banking segment is following a declining trend, having reported a contraction of 16.5%, 9.9% and 6.8%, respectively, during Q3 FY20.
• S&P has maintained a negative outlook on Natwest Group and considered BBB long-term rating.
• The Company has underperformed in comparison to its benchmark index, FTSE 100 as it has generated negative 34.22% year-to-date return against the index return of negative 14.00%.
• From a technical standpoint, the Company is trading lower than its 20-day simple moving average of GBX 161.52, indicating a further correction in the stock price.

Key Risks

• The Company is more exposed to counterparty credit risk and default risk.
• There is a possibility of more severe lockdowns imposed by the government in the near term.
• The interest rate fluctuation may cause disruptions in the business environment of the Company.
• The Company may implement the new process, which would increase the level of compliance risk.

Recent News

On 24 November 2020, the Company has declared a special dividend of US$0.01 for the three-month period ended on 31 December 2020 to be paid on 31 December 2020.

Financial Highlights (for three months ended on 30 September 2020 as on 31 October 2020)

(Source: Company result)

• The Company has reported much-improved profit before tax during Q3 FY20 in the amount of £355 million, while it has reported a loss of negative £415 million for the first nine-month period of FY20.
• Customer deposits of the Company was increased by £10.1 billion to £418.4 billion during Q3 FY20.
• With regards to its financial position, the Company is having strong liquidity coverage ratio (LCR) of 157% as of 30 September 2020.
• The Company has reduced its RWA (Risk-weighted assets) by £7.6 billion, bringing CET1 ratio to 18.2% during Q3 FY20, which is 100 basis points higher than the levels of Q2 FY20.
• The Company has reported a net impairment loss of £254 million during Q3 FY20, taking its Expected credit loss (ECL) ratio to 1.72%.

NatWest Group – Results centre

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Conclusion

The net loans to the customer for commercial banking segment was declined by £2.0 billion during Q3 FY20 in comparison to Q2 FY20 due to net Revolving credit facility (RCF) repayment of £3.1 billion and lower lending across Large Corporates & Institutions. The Company has reported a significant drop of £13 million during Q3 FY20 in its total income from retail banking, in comparion to equivalent period of the prior year, due to reduction of 13 basis points in net interest margin. The Company is now expecting its RWAs to remain lower than the previously estimated range from £185 billion to £195 billion. The Company has underperformed against its benchmark index, FTSE 100 and delivered lower year-to-date returns.

On the technical front, the Company is trading lower than its 20-day simple moving average of GBX 161.52, indicating a further correction in the stock price. The stock made a 52-week low and high of GBX 90.54 and GBX 265.00, respectively.

Based on its declining key performance indicators (KPIs) and various risk factors discussed above, we have given the "Avoid" stance on Natwest Group Plc at the current market price of GBX 157.45 (as on 14 December 2020, before the market close at 08:20 AM GMT), while we will keep track on its operational performance and update accordingly.

Standard Chartered Plc  - Declining Net Interest Margin

Standard Chartered Plc (LON: STAN) is the FTSE 100 listed Company, operating across various operating segments like Institutional Banking, Retail Banking, Commercial Banking and Private Banking.

The Company will declare its full-year FY20 results on 25 February 2021.

Investment Highlights - Standard Chartered Plc – Avoid at GBX 483.50.

• The Company is having a net interest margin of 1.23% during Q3 FY20, while the industry median is 2.04%.
• All financial parameters like underlying operating income, underlying profit before tax and underlying earning per share are following a declining trend during Q3 FY20 from the equivalent period of the prior year.
• The treasury income was plummeted by 88% during Q3 FY20 split equally across net interest income and other income.
• The stock has underperformed against its benchmark index, FTSE 100 and delivered negative 32.20% returns year-to-date.
• From a technical standpoint, the Company is trading at an RSI of 64.15, indicating a correction in the stock price.

Key Risks

• Changing Government policy and regulatory authority may cause short-term disruptions in its business environment.
• The Company is exposed to cybersecurity risk regarding data breaching.
• The ongoing challenges of Covid-19 pandemic and Brexit may increase its operating cost and hamper business activities.

Recent News

On 27 November 2020, the Company has updated that Naguib Kheraj will step down as Chair of Audit Committee and replaced by Phil Rivett effective 01 December 2020. David Conner will be replaced by Naguib Kheraj as Chair of the Board Risk Committee with effect from 01 December 2020.

Financial Highlights (for three months ended on 30 September 2020 as on 28 October 2020)

(Source: Company result)

• The underlying operating income of the Company has declined by 12% year-on-year to US$3.52 billion during Q3 FY20.
• Similarly, the underlying profit before tax was dropped by 40% to US$745 million during Q3 FY20.
• The credit impairment has worsened by US$74 million to US$353 million
• The net interest margin went down by 38 basis points to 1.23% during Q3 FY20.
• The RWA (Risk-weighted assets) of the Company went up by US$4 billion since 30 June 2020 and reach US$267 billion as of 30 September 2020.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group) 

Valuation Methodology: Price/Book Approach (NTM) (Illustrative)

Conclusion

The Company is expecting client demand to increase in FY21 with more markets came out of recession. The Company is expecting an adverse impact of interest rate cuts occurred this year should be reflected entirely in the financial performance of its next two quarters. The Company is expecting its credit impairment cost to remain at lower levels in the second-half of FY20 than its first-half. On the technical front, the Company is having 14-day RSI of 64.15, which creates doubts on its upside potential. Moreover, the stock has underperformed in comparison to its benchmark index, FTSE 100 and generated negative 32.20% returns year-to-date. The stock made a 52-week high and low of GBX 739.40 and GBX 334.25, respectively.

Based on its weak financial performance and elevated level of uncertainties, we have given the "Avoid" stance on Standard Chartered Plc at the current market price of GBX 483.50 (as on 14 December 2020, before the market close at 08:20 AM GMT), while we will consider reinvesting when we notice a positive change in its key financial indicators.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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