Deutsche Bank upgrades NatWest ahead of Ireland exit

DB said it has been nearly 10 years since the Irish real estate crisis, yet the banking sector remains in flux.

"NatWest's announced exit from Ireland offers opportunities for local banks to acquire high quality assets and to quickly expand in a country where credit growth has been lacking for the last decade," it said.

Deutsche’s preference among the Irish banks is AIB, which remains one of its European bank ‘top picks’. It upped its price target on AIB from €2.1 to €2.4. DB also lifted its price target for PTSB from €0.85 to €1.1 and maintained its ‘hold’ recommendation.

NatWest said in February that it would pull out of Ireland and focus on the UK market.

Deutsche pointed out that NatWest trades at a price-to-earnings premium to Lloyds and Barclays, reflecting its excess capital position. However, it said that given the nature of the excess capital such a premium is unjustified.

"For NatWest, we believe that an exit from Ireland in a capital generative manner over multiple years is entirely possible. However, if NatWest retains the tracker book and non-performing loans, shareholders could be waiting a very long time to see that excess capital return to group level and be paid out.

"Excess capital is often cited as the bull case for NatWest- but the majority sits in Ireland. It could be trapped (if deals fall through); less than expected (if NatWest has to shoulder restructuring costs); or take a long time to extract (as tracker mortgages roll off very slowly).

"Without the excess capital story, we just see a UK bank trading at a 20% premium to Barclays or a 5% premium to Lloyds, and we would rather own these."

DB maintained its 170p price target on the shares.