NatWest Group, formerly known as Royal Bank of Scotland, said on Friday it will buy back 590.7 million of its shares for £1.1 billion from the UK government — about 4.86% of the company’s issued share capital.

NatWest will be 59.8% government-owned after the deal, down from 61.7%.

The price of the transaction was yesterday’s NatWest share price close of 190.5p, well below the 502p the UK taxpayer paid for the shares when RBS was bailed out.

“We believe this is a good use of capital for the bank and our shareholders,” said NatWest CEO Alison Rose.

NatWest said  it intends to cancel 390.7 million of the purchased shares and hold the remaining 200 million shares in treasury.

“Holding ordinary shares as treasury shares gives the company the ability to cancel such shares at a later date, or re-issue treasury shares quickly and cost effectively, and may provide the company with additional flexibility in the management of its capital base, including the allotment of ordinary shares in relation to its employee share plans …” said NatWest.

“The off-market purchase of ordinary shares has triggered NWG to contribute £500 million to its main pension scheme in line with the memorandum of understanding announced on 17 April 2018. 

“After tax relief, this contribution will reduce tangible equity by £365 million. 

“CET1 (Common Equity Tier 1) will be reduced by £99 million as £266 million (equivalent to £364 million before tax relief) was recognised as a CET1 capital deduction as at 31 December 2020. 

“These will be recognised as part of the NWG Q1 2021 results. 

“The combined impact of the off-market purchase and the pension contribution, based on the NWG position at 31 December 2020, equates to a CET1 ratio reduction of 72 basis points and around a 1 pence increase in tangible equity per share.”

Russ Mould, Investment Director at Salford-Based investment platform AJ Bell, said: “It’s easy to forget that the Government still owns a big stake in NatWest given it has been 13 years since the bank was first bailed out during the global financial crisis.

“Even though a big chunk of shares is now heading back to NatWest, it could still be a long time before the bank is able to become a fully privatised business again.

“After the latest deal, the Government will still own nearly 60% of the company.

“At its peak in 2009, the Government owned 84.4% of NatWest, then better known as the Royal Bank of Scotland.

“It wasn’t until 2015 that some of the shares began to be sold off.

“In comparison, it took eight years for the Government’s entire 43% stake in Lloyds, acquired in 2009, to be returned to private hands.

“Sentiment towards the banking sector has been incredibly poor since the global financial crisis of 2007-2009, with investors showing little interest.

“Low interest rates have made it hard to make good money, balance sheets have needed repairing, dividends were absent for a long time and then payments were interrupted by the pandemic, and the sector has come under increasing regulatory pressure.

“The big question is whether we’re now at a turning point.

“Economic recovery is widely expected which could lead to higher interest rates and thus better earnings for banks, and the big players are in a much better financial shape.

“From an investment perspective, value stocks are in vogue and banks firmly fall under the value banner.

“Barclays certainly seems to think its shares are cheap, given how it now plans to buy back up to £700 million worth of its stock.”