Unlocking Strategic Value: Why NatWest Group (NWG) is a High-Conviction Buy in the Banking Sector Downturn

The banking sector has long been a barometer of macroeconomic uncertainty, but for value-focused investors, volatility often creates asymmetric opportunities. Nowhere is this more evident than in the case of NatWest Group (LSE: NWG), the rebranded parent company of the Royal Bank of Scotland (RBS). With a compelling combination of strong earnings momentum, improving risk metrics, and favorable valuation multiples, NatWest stands out as a high-conviction investment in today's dislocated market.

Earnings Momentum: A Foundation for Sustainable Growth

NatWest's Q1 2025 results underscore its operational resilience. The group reported attributable profit of £1.25 billion, translating to a 15.5 pence per share gain and a 18.5% return on tangible equity (RoTE)—well above its guided range of 15–16%. This performance was driven by deposit margin expansion (contributing to a 2.27% net interest margin) and cost discipline, with operating expenses declining 8.5% year-over-year.

The group's capital generation is equally impressive. A 49 basis points predistribution in Q1 2025 reflects its ability to retain earnings while maintaining a 13.8% CET1 ratio, up 20 basis points from December 2024. Looking ahead, NatWest expects to hit the upper end of its 2025 RoTE guidance, with income growth projected at £15.2–15.7 billion. These metrics suggest a bank that is not only weathering the current downturn but actively capitalizing on it.

Risk Management: A Shield in Turbulent Times

NatWest's risk profile has improved markedly. The group's loan impairment rate in 2024 was a mere 9 basis points, down from 19 bps between 2018–2023. This reflects disciplined credit underwriting and proactive balance sheet management, including £6.8 billion in risk-weighted asset (RWA) savings through credit risk transfers and asset sales.

The liquidity coverage ratio (LCR) remains robust at 150%, with £54.2 billion in headroom above the 100% minimum requirement. Meanwhile, the tangible net asset value (TNAV) per share rose to 347 pence in Q1 2025, driven by consistent profitability. These metrics position NatWest to navigate potential economic shocks while maintaining shareholder returns.

Valuation: A Discount to Intrinsic Value

Despite its strong fundamentals, NatWest trades at a discount to sector averages. Its P/E ratio of 8.81 is below the 2025 banking sector average of 9.78, and its P/B ratio of 1.05 is in line with the sector's 1.13 average. This divergence is striking given NatWest's superior risk-adjusted returns and strategic initiatives.

The discount is even more pronounced when considering long-term growth drivers. The acquisition of Sainsbury's Bank in May 2025 is expected to add 1 million customer accounts, while real-time payment (RTP) infrastructure investments position the bank to capture B2B transaction volumes. These catalysts justify a re-rating to at least the sector average, implying 20–30% upside for patient investors.

Strategic Catalysts: Digital Transformation and Market Share Expansion

NatWest's digital transformation is a key differentiator. 79% of Retail Banking customers now bank entirely digitally, and the AI-powered Cora+ assistant handled 11.2 million conversations in 2024, with half requiring no human input. These innovations reduce costs and enhance customer retention, creating a flywheel effect.

Market share growth is equally compelling. The group added 500,000 Retail Banking customers in 2024 and 10,000 in Commercial & Institutional banking, while Private Banking referrals rose 26%. Strategic acquisitions, such as £2.3 billion in Metro Bank mortgages and Sainsbury's Bank, further accelerate this trend.

Investment Thesis: A Buy-Zone Opportunity

NatWest's combination of strong earnings, improving risk metrics, and undervaluation makes it a compelling buy-zone opportunity. The bank's capital return framework—targeting 50% of attributable profit for dividends and potential buybacks—adds to its appeal.

For value-focused investors, the key risks include interest rate volatility and regulatory headwinds. However, NatWest's RWA management and digital-first strategy mitigate these concerns. The group's 2027 target of RoTE >15% and CET1 ratio of 13–14% provides a clear roadmap for long-term value creation.

Conclusion: A Strategic Entry Point

In a sector where many banks are trading at or below book value, NatWest's 1.05 P/B ratio and 8.81 P/E ratio suggest a compelling risk-reward profile. With strong earnings momentum, disciplined risk management, and strategic catalysts in play, the bank is well-positioned to outperform its peers. For investors seeking a high-conviction entry point in the banking sector, NatWest Group offers a rare combination of value, growth, and resilience.

Action Plan for Investors:
1. Initiate a position at current levels, targeting a 10–15% allocation to banking sector downturns.
2. Monitor Q2 2025 earnings for confirmation of capital return plans and digital transformation progress.
3. Rebalance based on macroeconomic signals, such as interest rate cuts or regulatory easing, which could accelerate re-rating.

In the words of Warren Buffett, “Be fearful when others are greedy, and greedy when others are fearful.” NatWest Group is a case where fear has created an opportunity worth seizing.