NatWest Group PLC – Challenging times lie ahead.

NatWest Group PLC (LON: NWG) is a FTSE 100 index listed provider of banking products and associated financial services.

On 19 February 2021, NWG expects to release its annual results for FY20.

Investment Rationale – Sell at GBX 154.50

• Over the past 1-year, NWG’s stock has yielded a negative return of around 32.20%, underperformed against the negative 12.95% return of FTSE 100 index.
• From a technical perspective, 14-day RSI (77.11) is in the overbought zone, and hence, stock price correction is expected in the short term.
• In Q3 FY20, net interest margin was 1.51%, which was lower than the industry median of 1.81%. The net interest margin has remained below the industry median for the past six quarters.
• The total income in retail banking decreased by 16.5% year-on-year in Q3 FY20.
• Under commercial banking segment, net loans to customers decreased by £2.0 billion in Q3 FY20, as compared to Q3 FY20.

Risk Assessment

• The Covid-19 pandemic and resulted in wider macro-economic disruptions posing a substantial risk to the profitability, capital, and liquidity position.
• It can face a higher volume of defaults and delinquencies.
• Moreover, the economic downturn can significantly impact the value of assets.
• Further, the income is likely to remain impacted due to lower transaction and lending volumes.

Recent News

12 November 2020: In order to simply the governance of NatWest Group in Northern Ireland, the bank proposed to transfer the majority portion of Ulster Bank Limited to National Westminster Bank PLC.

Q3 FY20 Statement for the quarter ended 30 September 2020 (as on 30 October 2020)

(Source: Company Website)

• During Q3 FY20, the results demonstrated resilience in the underlying business as impairments were relatively low; however, the full impact of Covid-19 is still unclear.
• The retail and business income fell 12.1% in Q3 FY20 against Q3 FY19 while the net interest margin was down year-on-year by 2 basis points.
• For Q3 FY20, net impairment losses were £254 million, primarily due to an expected credit loss (ECL) coverage ratio of 1.72%.
• At the end of Q3 FY20, CET1 ratio stood at 18.2%, 100 basis points higher than Q2 FY20, primarily driven by a £7.6 billion reduction in RWAs (risk-weighted assets).

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Following the associated ECL stage migration and limited level of defaults across lending portfolios in Q3 FY20, the Company expects to report impairment charge at the lower end of the £3.5-4.5 billion range. Adjacently, RWAs are expected to be below the previously guided range of £185-195 billion at the end of FY20, due to the relatively low level of procyclical inflation. However, there are inevitable credit, operational, and market risks which can not be ignored amid unprecedented market conditions. When the government support would come to an end, it could make the trading environment more challenging. Stock 52 week High and Low were GBX 265.00 and GBX 90.54, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on NatWest Group PLC at the current price of GBX 154.50 (as on 17 November 2020, before the market close at 8.10 AM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

Virgin Money UK PLC – Impacted by lower demand and uncertain economic outlook.

Virgin Money UK PLC (LON: VMUK), formerly known as CYBG PLC, is a FTSE 250 listed financial services Company, which deals in the business of providing solutions in the space of financial and banking services.

On 25 November 2020, VMUK expects to unveil its FY20 results.

Investment Rationale – Sell at GBX 141.95

• From a technical perspective, 14-day RSI (70.42) is in the overbought zone, and hence, stock price correction is expected in the short term.
• In H1 FY20, net interest margin was 1.62%, which was lower than the industry median of 1.82%. The net interest margin has remained below the industry median for the past two years. Similarly, loan growth and deposit growth have also remained below the industry median.
• Due to lower pipeline and reduced mortgage activity, VMUK is expecting a muted Q4 FY20.
• The economic outlook remained uncertain and increasing provisions can create financial difficulty.

Risk Assessment

• The COVID-19 outbreak has impacted the trading environment and has led to a material increase in impairment charges.
• Further increase in credit provisions, elevated unemployment and subdued house price recovery can keep the trading conditions challenging in the short-term.

Recent News

17 November 2020: VMUK has appointed Clifford Abrahams as Chief Financial Officer and Executive Director. He will join the Group in March 2021.

Q3 FY20 Trading Update for the quarter 30 June 2020 (as on 28 July 2020)

 (Source: Company Website)

• Due to the pandemic, Q3 FY20 results reflected lower demand from consumers.
• The Group had to increase its provisions to take uncertain economic outlook into consideration, which impacted margin, cost and capital management.
• In Q3 FY20, personal lending reduced by 2.7%to £5.2 billion primarily due to lower credit card balances.
• As of 30 June 2020, ET1 ratio increased to 13.3% due to nearly £0.5 billion of net reductions in RWAs.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In 9M FY20, net interest margin declined to 157 basis points, and the Group continued to expect the net interest margin of 155-160 basis points in FY20. The impact of the pandemic put pressure on revolving credit facilities and personal loan demand. The growth trajectory is dependent upon the consumer spending and economic activity, which might take some time to recover. Further, the Group has set provisions based on cautious economic assumptions; however, the intensity and longevity of the Covid-19 led disruption is still uncertain. Stock 52 week High and Low were GBX 222.10 and GBX 46.10, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Virgin Money UK PLC at the current price of GBX 141.95 (as on 17 November 2020, before the market close at 8.00 AM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

Henderson Far East Income Limited – Underperforming against the benchmark index.

Henderson Far East Income Limited (LON: HFEL) is a FTSE All-Share index listed closed-end investment entity. It invests across the Asia Pacific with the target of delivering income growth.

Investment Rationale – Sell at GBX 318.00

• Over the past 1-year, HFEL’s stock has yielded a negative return of around 12.23%, underperformed the negative 10.13% return of FTSE All-Share index.
• From a technical perspective, 14-day RSI (71.87) is in the overbought zone, and hence, stock price correction is expected in the short term.
• The Company anticipate several years of uncertainty due to the economic impact of the Covid-19 pandemic.
• During FY20, NAV and Net Assets significantly declined against FY19; recovery is likely to be more gradual than previously anticipated.

Risk Assessment

• The Covid-19 pandemic continued to inflict rising human costs.
• The market volatility can materially impact investment performance.
• Brexit and US/China tension can also impact the market in the short-term.
• Inappropriate investment strategy pertinent to asset allocation and level of gearing may result in underperformance.

Recent News

As on 12 November 2020, HFEL’s unaudited net asset value per share was 308.4 pence, calculated in accordance with the AIC formula (including current financial year revenue items). The dividend was deducted from the net asset value the Company's shares are now ex-dividend.

Financial Highlights for the year ended 31 August 2020 (as on 4 November 2020)

(Source: Company Website)

• During FY20, the Company reported a growing total annual dividend per share. The Total dividend was 23.00 pence (FY19: 40 pence), reflecting a 2.7% year-on-year increase.
• As of 31 August 2020, the dividend yield was 7.4% (FY19: 6.2%).
• During FY20, the NAV total return performance was minus 9.9%, against FTSE All-World Asia Pacific ex Japan Index of 7.9% and the MSCI AC Asia Pacific ex Japan High Dividend Yield Index of minus 7.7%.
• HFEL turned into a loss per ordinary shares from the earnings per ordinary shares in FY19.
• During FY20, the Company issued a total of 10,815,000 new shares, and raised £37.3 million for further investment.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The investor sentiments and economic conditions are depressed with Covid-19 social and economic impact, increasing US/China tensions, decoupling of supply chains and western reaction to recent events in Hong Kong and technology wars. Meanwhile, the IMF is forecasting a modest decline of 1.7% for the emerging and developing Asian economies as a whole. The global equity markets are currently feasting on the liquidity provided by central government support, and therefore, it can create further uncertainties once the stimulus is withdrawn. Therefore, it is suggested to book profit now since the stock has yielded a positive return over the past one month. Stock 52 week High and Low were GBX 374.00 and GBX 236.30, respectively.

Given the heightened level of uncertainties, we recommend a “Sell” stance on Henderson Far East Income Limited at the current price of GBX 318.00 (as on 17 November 2020, before the market close at 8.30 AM GMT), while we look forward to reviewing the support from upcoming catalysts to reinvest. 

 

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

*Dividend Yield may vary as per the stock price movement.

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