Morgan Stanley Reaffirms Its Stance

Morgan Stanley has maintained its “Equal Weight” rating on NatWest Group (LSE: NWG), reiterating a price target of £6.65. The decision signals a neutral outlook — one that expects the bank’s performance to broadly mirror that of its peers rather than materially outperform the UK banking sector.

This reaffirmation comes as the UK’s major lenders navigate an increasingly complex environment marked by sticky inflation, volatile gilt yields, and expectations of gradual rate cuts from the Bank of England in 2025.

While NatWest’s profitability has benefited from higher interest income over the past year, the firm’s analysts caution that these tailwinds are beginning to moderate as deposit competition intensifies and mortgage margins compress.

Balancing Profitability and Prudence

NatWest, still widely recognized under its historic Royal Bank of Scotland branding, has shown solid financial resilience. Its net interest margin remains one of the healthiest among UK peers, supported by a strong retail deposit base and disciplined cost management.

However, Morgan Stanley’s equal-weight stance suggests that future earnings growth could flatten as the rate cycle turns. The report highlights three principal constraints:

1. Slowing Net-Interest Income Growth — As the BoE gradually normalizes rates, banks are expected to face declining margins.

2. Competitive Deposit Market — Retail and corporate clients are increasingly moving funds into higher-yield products, pressuring banks’ cost of funds.

3. Macro Sensitivity — Household and SME credit risks could rise if UK growth remains subdued or unemployment ticks higher in 2026.

Despite these challenges, NatWest’s strong CET1 capital ratio and conservative risk exposure give it a meaningful cushion to sustain dividends and buybacks — factors that support the price target’s balanced nature.

Valuation Context and Market Sentiment

At the current trading range, the £6.65 target places NatWest near the midpoint of its recent valuation band, translating to roughly 0.8x book value — consistent with peers such as Lloyds Banking Group and Barclays.

Market reaction to the reaffirmed rating has been subdued, reflecting that investors already priced in a “steady-state” scenario rather than aggressive earnings acceleration. Analysts view this as confirmation that NatWest, while stable, may lack near-term catalysts to break decisively higher.

For institutional investors, the takeaway is clear: NatWest remains a core defensive play within UK financials, but not a high-growth story. Its stable returns appeal to income-oriented portfolios, particularly amid heightened geopolitical and monetary policy uncertainty.

What Lies Ahead

The next inflection point will likely come with NatWest’s upcoming quarterly earnings, where attention will focus on credit-loss provisions, deposit dynamics, and any revision to capital-return plans. Additionally, markets will monitor signals from the Bank of England’s policy path — a key driver of sector-wide repricing.

Morgan Stanley’s update effectively underscores a market consensus: the UK banking landscape is in a transition phase, moving from rate-driven profit expansion to margin defense and operational efficiency.

While the neutral stance suggests limited upside, it also implies confidence that NatWest is structurally sound — capable of weathering policy shifts, market volatility, and economic headwinds.