NatWest Group PLC (LSE:NWG) shares have been downgraded by RBC Capital Markets as analysts reckon positive earnings momentum from Bank of England rate rises has peaked.
The FTSE 100 lender has been among the “more rate-sensitive UK banks” that have outperformed so far this year, along with Lloyds – which was simultaneously upgraded.
“With inflation expectations stabilising and a more balanced outlook for the forward interest rate curve, we think that the rates trade has now played out,” the analysts said.
The City consensus is ‘baking in’ UK rates rising to around 4% in 2023 for the banks, RBC included, though this is lower than an implied forward base rate curve of circa 4.4%.
Expectations for net interest income “have started to turn”.
RBC acknowledged that its downgrade to ‘sector perform’, with a cut of the share price target to 290p from 300p, was going against the City consensus, with 19 ‘buy’ ratings currently on NatWest, according to Bloomberg, with five ‘holds’ and one ‘sell’.
The price target reduction is driven by an increase in our cost of equity by 25bps to 12.5% due to the bank's commercial real estate exposure and a 1% reduction in 2023 net profit forecasts “driven by higher cost expectations, partially offset by a lower tax rate following the announced reduction in the banking surcharge”.
While NWG valuation remains “attractive”, analysts Benjamin Toms said “we see the potential for more upside elsewhere”.
He said: “We prefer to own banks that have prioritised cost control over jaws progression,” citing HSBC and LLOY.
With compensation making up circa 50% of banks’ cost bases and several lenders expecting wage inflation next year of at least 5%, NatWest’s costs are forecast by RBC to increase 7% to £7.1bn in 2023.