Shore Capital says NatWest's return targets are unsustainable

(Sharecast News) - NatWest shares were pulling back slightly on Monday after a strong performance on Friday following a set of stronger-than-expected first-half results, but it wasn't enough to change Shore Capital's 'hold' rating on the stock. NatWest reported that its RoTE in the second quarter was 17.7%, with pre-tax profit of £1.77bn up 4% and around 8% ahead of consensus forecasts, Shore Capital highlighted. Earnings per share were up 12% at 15.3p and 1.5p (11%) ahead of consensus.

The broker raised its fair-value estimate for the stock from 495p to 500p, after the bank upgraded its full-year guidance for both income (from the previous £15.2-15.7bn range to >£16.0bn) and return on tangible equity (from 15-16% to >16%).

However, analyst Gary Greenwood said that the company "may find it difficult to sustain such high returns over the long term".

"While it is good to see guidance upgraded, this should not have come as a huge surprise (indeed we had noted conservatism in the estimates at Q1), noting that consensus was already at £16.0bn and 16.6% for income and RoTE respectively (we were a little lower at £15.7bn and 16.0% respectively)," Greenwood said.

Shore Capital estimates that near-term RoTE will be higher than guidance at around 17.0%, but noted that returns will be limited by competitive pressures (such as tightening mortgage spreads) and the risk for higher taxes on such high returns - speculation has been building that Labour may reverse the cut in the surcharge on bank profits made by the last government.

The stock was down 1.1% at 513.6p by 1557 BST.