NatWest Group PLC's (LSE:NWG) recent rerating has been achieved without significant levels of growth in the UK economy, for which it is largely a proxy, notes Peel Hunt.
But with the UK economy seemingly picking up that might be about the change.
Aside from the improvement in mortgages, Peel Hunt expects a strengthening UK economy to particularly benefit the SME sector, which is sensitive to wider economic performance, and in which NWG, courtesy of its RBS acquisition, is the largest player with a more than 20% market share.
Analysis said: “Growth in this sector would have a positive mix benefit for NWG’s business as SME loans typically have high NIM and return characteristics relative to larger corporate and some retail businesses.
“Non-funded income should also be boosted by rising economic growth rates as higher transactional volumes should be reflected in higher fee-generating opportunities, including payments and debt and equity issuance.”
Finally, a stronger economy should also be positive for credit quality.
Buy with a target price of 410p is Peel Hunt's view.