NatWest Shares (NWG) Making Moves As Bank Seeks To Offload Risk to Sustain Dividends

NatWest share price (LON: NWG) is a big mover today on the London Stock Exchange, but in the wrong direction for holders, down 3.08%.

The bank has announced it is taking proactive measures to enhance its capital efficiency and support its dividend payouts by engaging in significant risk transfer (SRT) transactions with investors.

This innovative financial strategy is aimed at reducing the risk tied to a portion of their loans, thus enabling the bank to increase its lending capabilities without compromising on its capital requirements.

Previously known as the Royal Bank of Scotland (RBS) and having undergone a substantial restructuring since its £46 billion government bailout in 2008, NatWest has built up excess capital reserves. Now under new leadership, with Rob Lloyd at the helm, the institution is focusing on balance sheet efficiency, particularly using tools such as SRTs to augment lending growth in the UK market.

The importance of these transactions has been highlighted by the introduction of the latest Basel regulations, which expect to propel banks into more active SRTs. Despite the anticipation, some financial analysts urge caution, noting the likelihood of challenges in achieving equivalent levels of capital relief under the new framework. They suggest banks may need to become even more innovative in managing their balance sheets to navigate the updates regulations effectively.

SRTs function by transferring lending risks to third parties either through derivatives or guarantees. This process allows banks to liberate the capital held against those loans while continuing to maintain customer relationships. The approach has been gaining traction, as evidenced by data from the European Central Bank which showcases that lenders under its supervision have engaged in approximately 317 billion euros ($345.88 billion) worth of SRTs over the two years leading up to the end of 2023. This figure underlines the substantial presence SRTs have in the market.

Nevertheless, the process of setting up SRTs can be complex, especially given regulatory requirements. Each SRT proposal must undergo rigorous evaluation by regulators to determine if it qualifies for capital relief. The time-consuming nature of this process has been a concern for some banks, prompting them to advocate for standardized SRT products that could streamline authorization timelines and maintain operational efficiency.

NatWest Group's initiative to bolster its lending activities through strategic transfer of loan risks presents a concerted effort to enhance capital utilisation while securing dividend distributions. As regulatory landscapes evolve and financial institutions navigate new rules, the SRT mechanism will likely continue to be an essential tool for banks like NatWest, striving to optimize their balance sheets and support their growth ambitions in a competitive market.