Is Natwest Group Plc (NWG) Poised to Benefit From Improving Margin Trends?

L1 Capital, an investment management firm, released its “L1 Long Short Fund” third quarter 2024 investor letter. A copy of the letter can be downloaded here. Over the quarter, global markets moved higher, due to lower inflation data which continued to trend downward as central banks increased interest rate reductions. The portfolio returned 2.4% for the quarter compared to a 7.8% return for the S&P/ASX 200 AI. Over the past five years, the portfolio return was 18.4% p.a compared to 8.4% p.a. for the index. In addition, you can check the fund’s top 5 holdings to know its best picks in 2024.

L1 Long Short Fund highlighted stocks like NatWest Group plc (NYSE:NWG) in the third quarter 2024 investor letter. NatWest Group plc (NYSE:NWG) offers banking and financial products and services that operates through Retail Banking, Private Banking, and Commercial & Institutional segments. The one-month return of NatWest Group plc (NYSE:NWG) was 6.74%, and its shares gained 94.92% of their value over the last 52 weeks. On November 12, 2024, NatWest Group plc (NYSE:NWG) stock closed at $9.98 per share with a market capitalization of $42.311 billion.

L1 Long Short Fund stated the following regarding NatWest Group plc (NYSE:NWG) in its Q3 2024 investor letter:

“NatWest Group plc (NYSE:NWG): NatWest is the largest commercial lender in the U.K. (20% share) and the second largest U.K. retail bank with ~13% of all mortgages. We see NatWest as best positioned in the U.K. Banking sector to benefit from improving margin trends, with topline growth supported by a rebound in U.K. housing and economic activity. Moreover, with significant buybacks owing to a strong capital position, NatWest should see ~8% EPS growth p.a. over the next three years vs. ~2% expected growth for CBA. Although CBA enjoys a more dominant market position in Australia vs. NatWest in the U.K., it appears overvalued in our view as it trades on ~24x FY25 P/E (historical highs) compared to only ~7x for NatWest.

NatWest (Long +10%) shares rallied on strong quarterly results including earnings ~28% ahead of consensus expectations and upgraded guidance driven by higher-than-expected revenues with net interest margin expanding 5bps. NatWest is the U.K.’s second largest retail bank with ~13% mortgage share and the U.K.’s largest commercial lender with ~20% share. In our view, NatWest leads the U.K. Banking sector with improving underlying operating trends, a superior mortgage margin trajectory and increasing interest rate hedge income. Importantly, management expects ongoing net interest margin expansion despite the impact of BoE rate cuts. We believe the company remains significantly undervalued, trading on an FY25 P/E multiple of only ~7x and a price to tangible book value ratio (P/TBV) of only ~1x. This is despite generating a 15% return on tangible equity and ~8% p.a. earnings growth over the next three years based on consensus expectations. We find these metrics and attributes very compelling, especially when compared to Australian banks.”

A person using a laptop to access a bank’s online banking system.

NatWest Group plc (NYSE:NWG) is not on our list of 31 Most Popular Stocks Among Hedge Funds. As per our database, 11 hedge fund portfolios held NatWest Group plc (NYSE:NWG) at the end of the second quarter which was 9 in the previous quarter. While we acknowledge the potential of NatWest Group plc (NYSE:NWG) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

In another article, we discussed NatWest Group plc (NYSE:NWG) and shared the list of best UK stocks to invest in. In addition, please check out our hedge fund investor letters Q3 2024 page for more investor letters from hedge funds and other leading investors.

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Disclosure: None. This article is originally published at Insider Monkey.