NatWest Group (NWG) Reports Strong Q4 Earnings and Provides Optimistic FY25 Outlook

NatWest Group plc (LSE: NWG) delivered a solid set of Q4 2024 results, demonstrating resilience in the face of economic uncertainties while setting an optimistic tone for 2025 and beyond. The bank reported an attributable profit of £1.25 billion, reflecting a strong return on tangible equity (RoTE) of 19.0%, and notable growth in both customer deposits and net lending.

Despite higher operating expenses due to the annual bank levy and strategic restructuring costs, NatWest has positioned itself to maintain profitability and capital efficiency while investing in long-term growth.

Q4 Performance Analysis

Revenue and Profitability Strength

NatWest’s total income (excluding notable items) increased by 2.7% quarter-over-quarter (QoQ) to £3.87 billion, driven by:

- Net Interest Margin (NIM) improving slightly to 2.19%, indicating stable lending profitability amid a higher-rate environment.

- Stronger corporate and institutional banking performance, with a notable increase in lending.

- Growth in retail banking mortgage balances, reflecting continued demand for home loans despite broader economic concerns.

This positive revenue trajectory supports the bank’s ability to sustain robust earnings growth into 2025.

Loan Growth and Deposit Expansion

- Net loans to customers (excluding central items) increased by £4.8 billion, highlighting ongoing strength in corporate and mortgage lending.

- Customer deposits grew by £3.9 billion, reinforcing NatWest’s funding stability and supporting future lending capacity.

These figures indicate that NatWest has been able to grow its balance sheet effectively while managing risks in a shifting economic environment.

Operating Costs and Capital Position

- Other operating expenses increased by £330 million in Q4 due to the annual Bank Levy and strategic restructuring expenses related to property exits.

- The Common Equity Tier 1 (CET1) ratio declined by 30 basis points, reflecting growth in Risk-Weighted Assets (RWAs) and higher lending activity.

- RWAs increased by £1.7 billion, primarily due to lending growth, which is a positive sign of business expansion rather than a deterioration in credit quality.

While costs have risen, the bank remains well-capitalized and committed to maintaining a CET1 ratio in the 13-14% range, providing a solid cushion for future expansion and shareholder returns.

Outlook for 2025: Strong Guidance with Continued Focus on Efficiency

Looking ahead, NatWest has set ambitious targets for 2025, reflecting confidence in its ability to drive growth, enhance profitability, and return capital to shareholders.

- Return on Tangible Equity (RoTE) is expected to be in the range of 15-16%, slightly lower than Q4’s 19% but still reflecting a strong profitability outlook.

- Total income (excluding notable items) is projected to be between £15.2-£15.7 billion, sustaining revenue strength seen in 2024.

- Group operating costs, excluding litigation and conduct costs, are expected to be around £8.1 billion, demonstrating a commitment to cost discipline.

- Loan impairment rates are projected to remain low, below 20 basis points, signaling confidence in credit quality.

- RWAs are expected to be in the range of £190-195 billion, depending on the final CRD IV model outcomes, reflecting continued growth in lending activity.

Long-Term Targets for 2027

NatWest has also provided long-term strategic goals that reflect a strong commitment to shareholder returns and financial discipline.

- Return on Tangible Equity is expected to remain above 15%, signaling sustained profitability over the next few years.

- The bank aims to maintain a CET1 ratio of 13-14%, ensuring capital strength and regulatory compliance.

- Ordinary dividends are expected to be around 50% of attributable profit from 2025 onwards, with potential for additional share buybacks as appropriate.

These long-term financial targets indicate a balance between growth, capital efficiency, and delivering shareholder value.

Investment and Market Implications

Bullish Case for NatWest Stock

- Revenue growth and NIM stability: NatWest continues to expand its lending portfolio and maintain a stable NIM, even in a higher-rate environment.

- Cost discipline and efficiency improvements: While operating costs increased in Q4, the bank remains committed to cost containment in 2025, helping to sustain profitability.

- Strong capital position and shareholder returns: The commitment to a CET1 ratio of 13-14% and a 50% dividend payout policy suggests that investors could benefit from solid capital distributions.

- Credit quality remains robust: With loan impairments expected to stay below 20 basis points, NatWest does not foresee significant credit deterioration, supporting its financial health.

Potential Risks to Watch

- Macroeconomic headwinds: If UK economic conditions worsen, particularly in housing and corporate lending, NatWest may face slower loan growth or higher default risks.

- Regulatory and political risks: As a major UK bank, NatWest remains exposed to evolving regulatory changes and political influences, which could impact its business operations.

- Competitive pressures: The UK banking sector is highly competitive, with challenger banks and fintech firms continuing to erode traditional market share.

Final Thoughts: A Well-Positioned Bank for Growth and Stability

NatWest’s Q4 earnings report highlights a bank that is executing well on its strategy, maintaining solid profitability, and preparing for long-term growth. With strong earnings, stable credit performance, and a commitment to shareholder returns, NatWest remains a compelling financial institution in the UK banking sector.

The bank’s 2025 guidance and long-term 2027 targets suggest continued financial strength, making it an attractive stock for income-focused investors and those looking for steady banking sector exposure. While macroeconomic risks remain, NatWest’s robust capital position and lending expansion provide a solid foundation for sustained growth.