Market Round-Up

In NatWest’s most recent financial report, the bank revealed a substantial 20% increase in pre-tax profits of £6.2bn, marking its largest annual profit since the 2007 financial crisis.

This surge in profitability can be attributed to rising interest rates, which have bolstered revenues for banks like NatWest, enabling them to charge higher rates for loans compared to savings products. As a result, the UK Government is confident that now is the time to sell its 31.58% stake in the bank.

This move had been hinted at by Chancellor Jeremy Hunt last year, with the aim of divesting the Government's share in the bank by 2025 or 2026. It appears that the wheels are already in motion, with reports from the UK Government Investments (UKGI) department suggesting a potential retail share offer to hit the stock market as early as this summer.

Formerly known as the Royal Bank of Scotland, the bank was bailed out by the Government in the 2008 financial crisis. The bailout cost around £45.5bn, giving it 84% ownership, to help save the UK financial system from collapsing. Since then, the Government has been progressively selling its shares in the bank, with shares being sold to institutional investors and repurchased by NatWest itself.

The impending share sale represents a significant milestone in the Government's efforts to recoup taxpayer funds invested during the financial crisis while also signalling confidence in NatWest's financial performance and outlook. It will be interesting to watch how the sale offer unfolds and NatWest’s growth continues.

The Organisation for Economic Co-operation and Development (OECD), comprising of 38 high-income countries and accounting for approximately 80% of global trade, has projected that its member states will issue a record number of debt in 2024, totalling US$15.8tn.

The figure marks a 12% increase from last year and exceeds the previous 2020 peak, when governments scrambled for funds to support households and business during Covid lockdowns. The increase is mainly driven by the aforementioned Covid-era borrowing, with a surge in bonds from the 2020-21 period that need to be refinanced.

Decade high interest rates are expected to substantially raise the cost of debt servicing for governments, from an average of 2.9% of GDP in 2023 to 3.4% by 2026. This renewed fiscal pressure comes at a time when many influential economies, primarily the US, are in election season, with political parties vying to maintain/gain power with fiscal stimulus commitments.

So far, the market has absorbed this elevated supply of government debt well. For instance, at time of writing, the yield on a UK 10-year benchmark bond is 4.12%, only slightly above the 12-month average of 4.10%.

However, with numerous central banks committed to quantitative tightening and with central bank held sovereign debt being sold to the market. There are concerns about the upward pressure this may have on bond yields. This is problematic as a rise in yield indicates a fall in bond price, resulting in capital loss for the bond holder.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall as well as rise in value. The information and views were correct at time of publication but may have changed at point of reading.