NatWest (LSE:NWG) shares advanced on Tuesday after Barclays upgraded the UK banking group to “overweight” from “equal weight” and increased its price target, citing stronger earnings prospects supported by higher interest rates, business expansion and potential benefits from the acquisition of Evelyn.
The shares gained 3.3% to 675.20p in London trading, outperforming the FTSE 100, which rose approximately 0.7%.
Barclays raised its price target for NatWest to 850p from 740p, an increase of nearly 15%. The revised target represents potential upside of approximately 26% from the quoted share price.
Higher Interest Rates Expected to Support Earnings
Barclays identified NatWest as a potential beneficiary of higher UK interest rates and a steeper yield curve, which could improve the bank’s revenue and profitability over the coming years.
The analysts increased their long-term Bank Rate assumption by 50 basis points to 4.25%, estimating that the change could lift NatWest’s earnings per share by approximately 5% in 2028.
The positive effect could eventually reach 10% as the bank’s structural hedge matures and higher interest rates are progressively reflected in returns.
Barclays also increased its earnings-per-share forecasts by as much as 7% across 2026 to 2028, primarily reflecting expectations of stronger revenue generation.
However, the analysts acknowledged that increased competition for customer deposits could partially offset the benefits of higher interest rates.
Despite this risk, Barclays does not anticipate a repeat of the significant shift towards more expensive deposit products experienced in 2023.
The bank suggested that households may be approaching the point at which further transfers of savings into higher-cost fixed-term deposits become less likely, potentially limiting additional pressure on NatWest’s funding costs.
Evelyn Acquisition Offers Additional Revenue Opportunities
Barclays also highlighted potential earnings benefits from NatWest’s integration of Evelyn, the wealth management business acquired by the lender.
According to the analysts, the integration is progressing positively and could create opportunities to expand relationships with existing wealth management clients.
In particular, NatWest may be able to offer additional banking products and services to Evelyn customers, supporting revenue growth across the combined business.
Barclays suggested that these cross-selling opportunities could allow NatWest to generate revenue synergies above its existing expectations over time.
The acquisition represents another potential source of earnings growth alongside the bank’s core lending and deposit operations.
UK Banking Tax Risks Remain Ahead of Budget
While Barclays adopted a more positive outlook for NatWest, it acknowledged uncertainty surrounding possible changes to UK banking taxation ahead of the forthcoming Budget.
Any increase in taxes affecting the banking sector could create additional costs and place pressure on profitability.
However, Barclays expects the potential financial impact to remain manageable.
The analysts also suggested that much of the uncertainty surrounding possible tax changes is already reflected in NatWest’s current share price.
As a result, Barclays considers the bank’s valuation relatively attractive despite the outstanding policy risks.
Valuation Discount Supports Barclays’ Positive Outlook
Barclays pointed to NatWest’s valuation discount relative to European banking peers as another reason for its upgraded recommendation.
The analysts argued that the combination of stronger earnings forecasts, potential benefits from higher interest rates and additional revenue opportunities from Evelyn was not fully reflected in the lender’s market valuation.
The revised 850p price target incorporates Barclays’ more favourable expectations for NatWest’s earnings performance and longer-term growth prospects.
Although deposit competition and potential tax changes remain risks, Barclays considers the bank well positioned to benefit from its existing operations and wealth management expansion.
Tuesday’s share price increase reflected a positive market response to the upgrade, with NatWest outperforming the broader London equity market.
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