Barclays upgrades NatWest to 'overweight'

Barclays upgraded NatWest shares to 'overweight' as it focused on the UK for investors to make gains from undervalued lenders.

Analyst Aman Rakkar also gave NatWest a 250p price target based on sector-leading capital returns ahead of consensus estimates.

After banning and then limiting bank dividends during the crisis the Prudential Regulation Authority is set to restore banks' freedom to make payments to shareholders, Barclays said. This makes UK banks more able to distribute capital than European peers, it added.

NatWest and other UK banks will also benefit from the release of expected credit loss provisions (ECLs). NatWest will write back £1.6bn, Barclays estimated.

NatWest were little changed at 207.1p at 11:08 BST.

"The PRA is due to update on whether banks will be allowed to resume distributions in coming weeks (ahead of 1H21 results). Unrestricted authorisation to pay is likely to sharpen market focus on NatWest’s capital returns plans," Rakkar wrote in a note to clients.

"We expect NatWest to release ECL provisions with H1 results, driven by updated … macro assumptions. While the market may ignore provision beats on the day of results, the associated boost to fully loaded capital ratios could see the market's assessment of NatWest’s already lofty surplus capital revised higher."

Threats to Rakkar's predictions include the "unwelcome surprise" of the regulator extending restrictions on dividends and new variants of Covid-19 casting doubt on the release of ECLs, he said. A major resurgence in mortgage competition would also worry investors, he said.