It has taken 14 years but a minor miracle is about to happen, probably within months: the state’s stake in NatWest will fall below 50%. We will no longer have to refer to the former Royal Bank of Scotland as “majority owned” by the government. Hallelujah.
NatWest’s full-year figures for 2021, to be announced on Friday, won’t in themselves trigger further disposals of government-owned shares, but they should confirm that the climate is ripe to continue a sell-down programme that has been buzzing along in the background for the past year.
At the start of 2021, the state’s ownership, managed by UK Government Investments, was 62%. Now it is roughly 52%, with the reduction coming via three means. First, sales back to NatWest itself. Second, sales to other investors via a “book-build” placement process. Third, a “trading plan” unveiled last July that drip-feeds shares into the market and avoids the inevitable small discount that has to be conceded in a lumpy placement.
The only effective limitation on these bit-by-bit methods is the standard one about prices having to represent “value for money for taxpayers”. That is not currently an impediment because chancellors long ago accepted that the public purse was never going to recoup the full £46bn pumped into RBS during the depths of the 2008-09 banking crisis.
Some £1.1bn was raised by selling a chunk of shares at 190.5p last March, and the same again in May at almost exactly the same price. Since then, NatWest’s share price – in common with most banks’ – has improved very nicely. The closing price at the end of last week was 253p. There is every reason for the government to keep dribbling shares into the market.
The main interest for other shareholders in this Friday’s report is whether the spectacular recovery in banks’ valuations can be sustained. In NatWest’s case, it’s been quite a ride since the pre-vaccine low of 95p-ish in September 2020, a time when banks were piling up provisions as they prepared for a locked-down economy to impair their loan books on several fronts – notably business loans, personal loans and credit cards.
Instead, furlough and Covid support schemes held down defaults and the surge in unemployment didn’t materialise. Last July, in its half-year report, NatWest was able to write back about £600m of impairments “as a result of the improved economic outlook”. Another £242m was released at the nine-month stage.
Will more reversals happen at the full-year stage? Actually, analysts say no – probably because the whoosh of recovery (the UK economy grew 7.5% in 2021, we learned last week) is in the rear-view mirror and we’re now looking at rising interest rates, higher taxes and a cost-of-living squeeze.
Therein lies the real interest in NatWest’s numbers: management’s view of the medium-term future. On one hand, banks will be enjoying the rise in interest rates, which relieves pressure on their lending margins. On the other, squeezed household budgets and reduced consumer confidence tends to reduce demand for credit.
Back in October, chief executive Alison Rose saw “challenges in the economy and for our customers” but her tone was positive overall. Any change to that nuanced outlook will be of wider interest because NatWest is the first big UK lender out of the blocks in this year’s reporting season.
One suspects she’ll defer any excitement over the government’s looming sub-50% holding until the milestone has been passed. Instead, the focus will be on dividends and share buy-backs, where the City expects a large helping of both on the back of pre-tax profits forecast to be £3.1bn. But the outlook statement is the thing: NatWest, along with Lloyds, offers a good guide to the underlying health of the UK economy, and the mood may be shifting.