Will NatWest Continue To Benefit From Rising Interest Rates?

Trade NatWest Shares Your Capital Is At Risk
Tim Worstall
Updated: 18 Feb 2022

Key points:

  • Bank margins tend to expand with rising interest rates
  • However, the government still owns the majority of NatWest
  • The interaction of those two might determine the price
  • The Best Financial Stocks to Buy Right Now

NatWest Group PLC (LON: NWG) shares have reacted with pretty much a “Meh” to the results announcement. NatWest returned to profit, the dividend is 7.5p, there’s to be a £750 million share buyback, but not a whole lot of share price movement there. One possible reason is the vast share overhang of the government’s continuing stake.

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Bank shares like NatWest should, as we’ve said before, benefit from rising interest rates. For banks live off their margins. That is, the difference between the deposit rates they pay and the interest rate they can charge on loans. This past decade has been horrible for retail banks given the artificially low interest rates. No one really has been interested in getting a negative rate on a deposit, but the rate that can be charged on loans has been pushed down by quantitative easing. That means margin compression for the banks like NatWest.

There was also, of course, that near-death experience as RBS.

Also Read: Which Banks Benefit From Rising Interest Rates Not Passed On To Savers?

So, as interest rates climb, as we expect them to into the future, margins should widen. The cost base doesn’t change even as gross margin does, so we’d expect the effect of rising interest rates to feed through directly to the bottom line. Perhaps things won’t be that simple of course. Rising interest rates might tip some borrowers over the edge into insolvency and so increase default rates. But we do expect the mix and match of those two to be beneficial.

So, why aren’t NatWest shares stonking to the stars? The macroeconomic environment is turning NatWest’s way, we’ve a good set of results showing the management seems to be running the business well enough. Shouldn’t we be seeing a decent rise?

One part of this is that NatWest shares are already 25 to 30% up on the past year. So, some of this improvement has been anticipated. That’s the way stock markets do work, buy the rumour and sell the fact – or, markets are forward-looking. But the other and perhaps more important part is that the government still owns the majority stake in NatWest.

We also know that the government would love not to be owning that majority stake. So, every time that NatWest shares either surge or seem like they should we get the government brokers coming back to dump another few percentage points upon the market. This produces an obvious enough cap on NatWest shares’ performance. Any time there’s a decent rise there will be a wave of selling.

This will obviously end at some point. But that point is probably when the NatWest share price will start to really reflect the potential performance of the underlying business. The more the government stake gets sold down then the worse the short-term performance but the more the possibility of long-term outperformance.

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