Buying NatWest, NWG, Buying Barclays, BARC – Should We Follow?

NatWest (LON: NWG) shares are up 1.5% on the news that they’ve bought in a part of the government’s stake in the bank. HM Treasury has sold, and NatWest has bought, 549,851,147 shares of that formerly over 50% stake. This is 4.91% of the entire issuance and it reduces HMT’s stake in NatWest below 50%.

At the same time Barclays (LON: BARC) has announced that it made something of a booboo. Under their exchange-traded and structured notes programme they had over-issued in the US. This means that holders can sell back to Barclays at the issue price. This is one of those mistakes that shouldn’t happen but clearly has. Barclays is keen to remind us all that this won’t stop the bank from buying in its own shares under the scheme already announced. But it will delay the programme until Q2 of this year.

Also Read: Five Best Starter Stocks For Beginners

If the banks are buying in their own shares then the big question for us as traders is whether we should follow them. After all, the bankers probably know more about the health of the banks than we do so if they’re buying, should we?

The difficulty here is that there are two entirely different effects to weigh up here.

Both inflation and rising interest rates are good for bank profits. This is because banks live on their margin – the difference between what they borrow at and what they lend at. The actual level of interest rates doesn’t matter so much, it’s the difference between those two rates, deposit and lending, which does.

Those margins have been distinctly compressed this past decade and more. Quantitative easing has meant that lending rates have been very low. Which would have been fine, if deposit rates had fallen just as much, but they haven’t. For deposit rates haven’t fallen below zero – thus the gap between the two rates has fallen, impacting bank profits.

As interest rates rise these margins will decompress and this effect will feed through directly to the bottom line of the banks. Much the same is true of the effects of inflation – real interest rates might not change so much but the gap between nominal deposit rates and nominal lending rates will expand.

On the other hand, there is a war on. Not right here but that global economy is being upended. Energy prices are spiralling upwards, there’s significant fear that we’ve another recession arriving. Recessions are not good for bank profits, obviously, as default rates rise during them. Outside something truly appalling the banks have enough capital to survive this, but a recession arriving is clearly a negative for bank profits.

The net effect of the two processes? Well, the banks themselves clearly think, as they are buying in their own shares, that overall it’s going to be positive. But it is necessary to balance those two effects to be able to come to a clear position on UK bank shares like NatWest and Barclays.