Interest rate outlook is key

Bank stocks are highly cyclical。Rising and falling interest rates have greatly affected its underlying profits, with the biggest driver being the widening spread between the cost of capital and bank lending rates。Typically, as interest rates soar, bank profits rise as they can earn more from widening net interest margins。

In fact, Natwest's net interest income reached £2.9bn in the last quarter alone, up 51 per cent from the previous year.。Total pre-tax revenue for the full year 2022 totaled a staggering £5.1 billion, up 33% from 2021, with a double-digit return on tangible equity.。

Despite a string of solid results, Natwest's share price was downgraded mainly because of two potential negatives:

1.The base rate is currently expected to peak this year and will not be much higher than the current 4%, suggesting that Natwest's net interest income is likely to stagnate over the next 12 months.。
2.Economic headwinds from rising interest rates could lead to weaker demand and severe loan impairments in the future。

Both are likely to reduce Natwest's profits, so investors are taking a more cautious approach。

On the bright side, however, Natwest will continue to generate significant profits for the foreseeable future。The bank, worth £27 billion, paid up to 4.8% dividend yield, but at the same time undervalued (7-8 P / E)。The bank is continuing its share repurchase program due to abundant liquid resources。If the UK economy can "ride out" 2023, the bank could be a good bet amid volatile markets。

Natwest's Bull Trend

Despite recent setbacks, Natwest's bull market may not be over yet。

Note that Natwest's shares have risen nearly 50% since October。In terms of market valuation, this is a significant step forward。Overbought and in need of a pullback, traders may just take profits after annual results。

In theory, Natwest's long-term uptrend seems intact, even after the latest gaping decline。The pattern of lower reaction highs since 2020 remains。Thus, the multi-week retracement of the previous rally could be a continuation of the long-term bull trend。