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NatWest - 1.8bn pound special dividend announced

Total income rose 21% to £6.2bn in the first half.

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Total income rose 21% to £6.2bn in the first half, reflecting a 16% increase in net-interest income to £4.3bn. Other income rose to £1.9bn from £1.4bn. The group's been boosted by rising interest rates and growth in mortgage lending. Operating expenses only rose by just over £150m, meaning underlying operating profit rose 53.5% to £2.7bn.

The group said: "We continue to monitor the evolving economic outlook and are mindful of the impact that higher levels of inflation, higher interest rates and supply chain shortages are having on our customers."

NatWest announced an interim dividend of 3.5p, and a special dividend equivalent to £1.8bn or 16.8p per share.

The shares rose 7.2% following the announcement.

View the latest Natwest share price and how to deal

Our view

NatWest is a traditional beast in Banking Land. By that we mean it generates most of its income from interest payments, with only a smaller proportion coming from things like fees or commission from institutional level deal-making.

That means interest rate hikes have typically been great news. Mortgage rates are higher, and overall that's resulted in some brighter results. As is a generally buoyant mortgage market, meaning volumes are moving in the right direction too.

We are continuing to monitor credit card and other secured lending, which has previously lagged rivals. Since this higher interest rate debt is particularly lucrative that's not ideal, and combined with a relatively high cost:income ratio means there's work to do to boost growth and organic profitability.

But for all the moves in the income and profit lines, it's still the balance sheet that really pops off the page. NatWest's running on a Common Equity Tier (CET1) ratio of over 14%. That's very comfortable. The planned exit from the Republic of Ireland should free up yet more capital in the coming years.

That's where the bumper special dividend comes in. Banks are limited with what they're allowed to do with their excess capital, with dividends and buybacks on the approved list. Trimming the government's remaining stake in the business will take priority over dividend growth.

The other thing to keep in mind is a weakening economic outlook. A consumer base that's feeling the pinch plus rising rates means there is a lot of uncertainty. A severe economic downturn would be a thorn in the side of all banks.

Rising interest rates should elevate NatWest's prospects in the medium term. But it's important not to get carried away, rates are still very low by historical standards - so this isn't yet a jet fuelled cure-all. However, investing is a long-term game, and a balance sheet awash with capital should allow NatWest to weather a spell of ups and downs. The bank that emerges will be both smaller and duller than what went before, but ultimately that may be no bad thing.

NatWest key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Half Year Results

In Retail Banking, total income rose to £2.6bn from £2.2bn, helped by higher deposit income, boosted by rising interest rates. Net loans to customers increased by £6.5bn, largely reflecting continued mortgage growth. Net Interest Margins were 2.53%, up from 2.26% - these show the difference between what a bank earns in interest on deposits and pays on deposits.

Private Banking also saw total income rise, reaching £461m compared to £368m. Growth was led by "robust deposit and lending growth with strong net new money despite volatile investment market conditions". Net interest margins were 3.34%, compared to 2.62%.

Net interest income rose in the region of £300m in Commercial & Institutional, reaching £1.8bn. Total income was 18.7% higher at £2.9bn. Higher interest rates, stronger fees and balance sheet growth all contributed to performance.

NatWest's CET1 Ratio - an important measure of capitalisation - was 14.3%, a 1.6 percentage point reduction, partly reflecting the increase in risk weighted assets. The group's cost:income ratio fell to 58.3% from 67.6%.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 29th July 2022