NatWest share sale starts life on shaky ground

Don’t tell Sid. The UK has a tough sell on its hands. This year the government is planning to offload its shares in NatWest, one of the country’s largest lenders. The bank’s relatively decent performance in 2023 could have encouraged the British public, which bailed it out in the first place, to buy stock. But falling interest rates and a weak economy make for a dicey investment case.

NatWest, the product of an ill-fated merger first with RBS and then ABN Amro, had to be rescued by taxpayers after the 2008 financial crisis. Since then, the government has been gradually selling down its original 84.4% holding and now is planning to flog its final slab of 35%. The shares will be offered as early as this June via a retail sale to the British public akin to the privatisations of the 1980s. One of those – British Gas – is remembered for the famous slogan “If you see Sid ... tell him” – a call to spread the word among ordinary folk.

On the face of it, NatWest’s prospects look decent. It makes its money from taking deposits from British savers and lending them out mainly through “prime mortgages” to customers with the best credit histories. That’s why its mortgage loan book, with a relatively low average loan-to-value of 55%, looks robust despite a sharp rise in interest rates. Higher borrowing costs, which boost banks’ margins, helped NatWest to deliver a near 18% return on tangible equity last year.

Unfortunately for new CEO Paul Thwaite, that may be as good as it gets. The bank is expecting rates to fall over the coming two years as the Bank of England responds to lower inflation. That will reduce the margin it can earn on lending out deposits. The macro outlook is also looking gloomy. The UK economy fell into a recession in the second half of last year, and, if subdued growth persists, customer appetite for loans may wane. Lastly, customers are capitalising on higher saving rates. At the beginning of last year, 6% of NatWest customers had their savings in fixed-rate accounts but by the end of 2023 that number had increased to 16%. All of this explains why Thwaite reckons the bank’s ROTE is likely to fall to 12% this year.

The trickier outlook may prompt UK finance minister Jeremy Hunt to delay a stake sale altogether. But if he decides to go ahead, a more appropriate campaign slogan would be: “Tell Sid to stay away.”