Barclays Cite Valuation In Downgrade of Natwest Shares (LON:NWG)

NatWest Group plc (LON:NWG) shares experienced a downturn today, retracting from 52-week highs reached earlier in the week, following a downgrade from Barclays. The adjustment in rating reflects growing concerns about the bank's valuation after a period of strong performance.

NatWest's share price is currently 3.39% lower at 638.20p, a notable pullback after hitting recent peaks. The downgrade from Barclays to ‘Equal Weight' from ‘Overweight,' albeit with an unchanged price target of 700p, has contributed to the negative sentiment.

Barclays cited valuation as the primary driver for the downgrade, suggesting that the stock's recent rally may have priced in much of the near-term upside.

The downgrade by Barclays signals a shift in perspective regarding NatWest's potential for further gains. While acknowledging positive factors such as hedge repricing and volume growth exceeding expectations, Barclays anticipates adjustments to NatWest's capital targets. Specifically, the firm believes NatWest may lower its target Common Equity Tier 1 (CET1) ratio to 13% from the existing 13-14% range.

This potential reduction, coupled with headwinds from increased risk-density lending and regulatory inflation, could impact consensus CET1 estimates negatively, potentially by 50-90 basis points. Consequently, Barclays projects below-consensus buybacks, resulting in a cash return yield of 8-9%, which, while still above the sector average of 7%, is not enough to warrant an ‘Overweight’ rating, in their view. The firm now sees Lloyds Banking Group as a more attractive option within the sector.

Prior to Barclays' downgrade, Goldman Sachs also adjusted its stance on NatWest, downgrading the stock to ‘Neutral' from ‘Buy' just over 1 month ago, December 4. The price target was slightly lowered to 685p from 665p. Goldman Sachs' decision stemmed from substantial positive earnings revisions since October 2024, with 2026 estimated net profit revised upward by 30% in consensus estimates and 17% in Goldman Sachs’ projections. The firm pointed out that NatWest shares had undergone a re-rating from a 7x to a 9x price-to-earnings (P/E) ratio based on 12-month forward consensus, indicating a “broadly fairly valued” stock.

The latest downgrade highlights concerns that the bank's valuation has become stretched following a period of strong financial performance and capital generation. While the underlying fundamentals of NatWest remain solid, markets suggest that much of this positive outlook is already factored into the current share price. This has led to a more balanced risk/reward profile, prompting analysts to adopt a more cautious stance on the stock.

Today’s price action underscores the sensitivity of NatWest shares to analyst sentiment, particularly following a substantial rally, and suggests that future performance may hinge on the bank's ability to deliver earnings growth that exceeds already elevated market expectations.