NatWest Group PLC downgraded by Jefferies on ‘risks to the downside’

NatWest Group PLC (LSE:NWG) shares have been downgraded by Jefferies after around a strong run on the back of the Bank of England rate expectations.

The FTSE 100 lender’s underappreciated attributes that created a positive risk/reward asymmetry and led to a prior ‘buy’ rating “are now largely in market expectations”, Jefferies said as it cut its rating to ‘hold’ from ‘buy’.

There is also now less scope for net interest income upgrades, the analysts said, with an analysis of NWG’s performance over the previous tightening cycle in 2017/2018 suggesting “the risks are to the downside” given group net interest income declined last time.

Given that the analysts anticipate a recovery in card lending and see prospects for wage growth to “breathe new life” into unsecured consumer lending, NWG’s relatively lower concentration of consumer lending “offers less leverage to such growth”, they added.

While the analysts see clear savings opportunities from the winding down of the Ulster business and further cost rationalisation at the NatWest Markets arm, achieving management’s present guidance of a 4% per annum reduction in the cost base “may be a challenge in light of inflationary tendencies”.

The implication of all the above, they concluded, is that “the risk/reward framework on NWG is no longer asymmetric”, in other words buying the shares might not be worth it.

Looing at potential upsides and downsides for net interest income alone, the analysts said if NWG realises the full benefit of interest rate hikes as the bank has itself outlined, the upside would be 29% but should net interest income decline to the same magnitude it did in the 2017/18 cycle, the downside is minus-28%.