Investing.com -- UBS reiterated its bullish stance on NatWest (LON:NWG), citing attractive valuation metrics and robust return prospects, even after the bank’s £11 billion bid for Santander (BME:SAN) U.K. was reportedly turned down.
The Financial Times disclosed that while NatWest’s proposal is no longer active, Santander’s recent €7 billion capital raise from selling a stake in its Polish operations to Erste Bank (VIE:ERST) has diminished the likelihood of a sale involving its U.K. unit.
Acquiring Santander U.K.’s retail and business bank would have marked a major expansion for NatWest, with the target’s forecast FY24 income and pre-provision profit representing about a quarter of NatWest’s, supported by 43% of its loans and 35% of its deposits, UBS said in a note on Monday.
Santander U.K.’s retail division, which constitutes about 80% of the size of NatWest’s equivalent segment, is characterized by a lower interest margin, primarily due to its balance sheet structure.
According to UBS, the £11 billion offer would amount to 12.6 times the estimated FY24 net income of the Santander division and 1.2 times its tangible net asset value (TNAV), assuming the division’s £10.5 billion TNAV is allocated based on its share of loans.
The potential impact on capital and earnings per share for both the buyer and seller would be influenced by various factors, including allocated TNAV, restructuring costs, and initial balance sheet revaluation.
UBS analysts highlighted the strategic rationale for a potential sale, noting Santander’s limited progress in diversifying its business and that its FY24 net profit is expected to be only slightly below FY14 levels.
The sale of the Polish unit has bolstered Santander’s capital position, rendering the need for a U.K. disposal less urgent, especially given the U.K. division’s contribution of over 10% to the group’s earnings and its role as a lower-risk, stable entity within the group.
If Santander were to accept an offer based on an assumed £9.2 billion in allocated TNAV, UBS estimates that Santander could see a roughly 140 basis points uplift in CET1 capital, at the expense of an approximate 8% loss in pro-forma group earnings.