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NatWest Group - buyback announced

Total income was flat compared to last year, at £10.5bn, as net interest income rose 1.8%.

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Total income was flat compared to last year, at £10.5bn, as net interest income rose 1.8%. That offset a decline in non-interest income, largely because of lower trading income. The release of provisions put aside in case customers defaulted on their loans meant pre-tax profit of £4.0bn was much higher than 2020's £481m loss.

NatWest was fined £264.8m in the year, relating to its failure to adequately monitor an account used for money laundering.

For the new financial year the group expects ''to achieve a return on tangible equity of comfortably above 10%''.

The group announced a final dividend of 7.5p and will start a share buybacks up to £750m.

The shares fell 2.0% following the announcement.

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Our view

Default rates in the loan book have been significantly lower than NatWest had feared. That's resulted in the release of some historical provisions and profits are soaring. It's also encouraging to see some alternative sources of income doing well. Things like fees and commission don't rely on interest rates and are a more resilient form of income.

Speaking of interest rates, rate hikes are great news. NatWest relies on rates more than others. Mortgage rates are already being increased, and overall that's resulted in some brighter results. The ongoing work to shrink investment bank, NatWest Markets, means NatWest is generating most of its revenues from interest payments these days too.

We do have some concerns that the bank's customers haven't seemed to respond to the improved economic conditions quite as quickly as at some rivals - with credit card and other secured lending not rebounding as fast. 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 over the last year, it's still the balance sheet that really pops off the page. NatWest's running on a Common Equity Tier (CET1) ratio of 18.2%. That's ludicrously high. The planned exit from the Republic of Ireland should free up yet more capital in the coming years.

That inevitably raises questions about what the bank intends to do with the billions in surplus capital going forwards. Dividends and a hefty buyback are back, but we suspect trimming the government's 51% stake in the business will take priority over dividend growth. The bank has approval to buy up to 4.99% of its shares back from the government each year.

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.

Full year results

Total income rose in the retail banking business and private banking while the International Banking & Markets arm of RBS and commercial banking saw a decline.

Total net loans to customers was broadly flat at £359bn, largely driven by increases in the Retail division because of higher mortgage lending. Net lending levels excluding government support schemes rose £7.8bn.

NatWest had net interest income of £7.6bn. This also helped offset some of the decline in net interest margins, but these still fell to 2.08% from 2.13%, as lower interest rates affected deposit returns.

Operating expenses fell to £787m from £1.0bn.

NatWest's CET1 ratio, which is an important measure of the bank's capitalisation, fell to 18.2% from 18.5%. Excluding accounting changes, the CET1 ratio was 17.8%. The decline reflects shareholder returns, partially offset by the continued reduction in risk weighted assets.

The release of provisions helped group return on equity reach 9.4%.

The group's accelerating its digital strategy, following changing customer behaviour in the pandemic. Alison Rose, CEO, said: ''around 60% of our retail current account holders now only interact with us digitally''.

The release of provisions, which boosted profits, means the group's return on tangible equity went from 0.8% to 8.5%.

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: 18th February 2022