NatWest Group: Has the Earnings Power and Capital Return Narrative Justified the Rising Analyst Targets?

The recent surge in analyst price targets for NatWest Group has sparked a critical question for investors: Are these valuation upgrades underpinned by sustainable improvements in earnings power and capital returns, or are they driven by short-term optimism amid lingering sector risks? To answer this, we must dissect the bank's 2025 performance, its strategic initiatives, and the broader macroeconomic and regulatory landscape.

Earnings Power: A Foundation of Resilience

NatWest Group's 2025 financial performance has been a cornerstone of the bullish narrative. The bank's full-year income guidance of £16.3 billion (excluding notable items) and a return on tangible equity (RoTE) above 18% signal robust profitability. This strength is further reinforced by Q3 2025 results, where earnings per share (EPS) of 0.5276p exceeded forecasts by 24.35%, and revenue hit $5.55 billion, surpassing expectations.

Cost efficiency has also improved markedly. The cost:income ratio for H1 2025 fell to 54.2%, down from 59.0% in the same period in 2024 according to market data, while the year-to-date ratio (excluding litigation and conduct) dropped to 47.8% in Q3 2025 as reported. These metrics highlight NatWest's ability to streamline operations, a critical factor in sustaining margins amid competitive pressures.

However, net interest income (NII) remains a vulnerability. H1 2025 NII declined to €39 million, primarily due to lower interest rates and changes in the funding book according to market analysis. While the annualized net interest margin (NIM) for Q3 2025 reached 3.01%, this reflects a 74-basis-point increase from Q1 2025's 2.27%, driven by deposit margin expansion. The sustainability of this trend hinges on the UK's interest rate environment, which remains uncertain as the Bank of England navigates inflationary pressures.

Capital Returns: A Strategic Commitment

NatWest's capital return strategy has been a key driver of investor confidence. In Q3 2025 alone, the bank repurchased 71.1 million shares for £374.29 million, underscoring its commitment to shareholder value. This aligns with its broader capital management framework, which includes a CET1 ratio of 25.0% as of 30 June 2025 according to market reports, well within its target range of 13-14% as cited in industry analysis.

Analysts have taken note. JPMorgan raised its price target to 730 GBp with an Overweight rating, while Citi lifted its target to 690 GBp, reiterating a Buy stance according to market analysis. Morgan Stanley's increase from 620 to 665 GBp further reflects growing comfort with NatWest's execution and growth momentum as reported by analysts. These upgrades are not merely speculative; they are tied to tangible actions, such as the £2.3 billion acquisition of Metro Bank's prime residential mortgages in September 2024, which strengthens NatWest's retail banking footprint.

Sector Risks: Navigating a Complex Landscape

Despite these positives, sector-specific risks loom large. The UK banking sector operates in a highly competitive environment, with NatWest facing challenges from traditional rivals like Lloyds and digital disruptors such as Revolut and Monzo as noted in industry reports. Strategic acquisitions, including Sainsbury's Bank in May 2025 as reported, aim to mitigate this, but integration risks and regulatory scrutiny remain concerns.

Macroeconomic headwinds also persist. The Bank of England's December 2025 Financial Stability Report highlights risks from global macroeconomic uncertainty, geopolitical tensions, and potential asset price corrections as detailed in the report. For instance, stretched valuations in AI-focused tech firms could lead to higher lending losses if a market correction occurs as noted in the analysis. While the UK banking system remains well-capitalized-evidenced by the 2025 Bank Capital Stress Test as reported-NatWest's liquidity coverage ratio (LCR) of 219% as of 30 June 2025 according to financial data suggests a cautious approach to liquidity management.

Regulatory changes further complicate the outlook. The Financial Policy Committee's reduction of the benchmark Tier 1 capital requirement from 14% to 13% as reported reflects a more resilient system, but compliance with evolving AI and embedded finance regulations could strain operational costs as noted in industry analysis.

Conclusion: A Balanced Outlook

The rising analyst targets for NatWest Group appear justified by its improving earnings power and capital return strategy. Strong cost efficiency, a robust CET1 ratio, and aggressive share buybacks demonstrate a clear commitment to shareholder value. However, the sustainability of these upgrades depends on the bank's ability to navigate sector risks, including competitive pressures, macroeconomic volatility, and regulatory shifts.

For investors, the key takeaway is that NatWest's valuation upgrades are not a speculative bet but a calculated response to tangible improvements in its fundamentals. Yet, prudence is warranted. The bank's long-term success will hinge on its capacity to maintain operational discipline while adapting to a rapidly evolving financial landscape.