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NatWest - buybacks announced as income jumps

NatWest's full year total income jumped 26.1% to 13.2bn pounds, largely reflecting higher net interest income.

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NatWest's full year total income jumped 26.1% to £13.2bn, largely reflecting higher net interest income. Net interest income has benefitted from higher interest rates, which made lending more profitable. Non-interest income also rose by £420m to £3.3bn.

Operating expenses remained broadly flat across the year. In contrast to last year when the group unwound £1.2bn worth of impairment charges, NatWest recognised impairment charges of £337m this year, in expectation of higher rates of loan defaults. Despite this, pre-tax profits rose from £3.8bn to £5.1bn.

The CET1 ratio, which is an important measure of how well-capitalised a bank is, stood at 14.2%.

A final dividend of 10p per share has been announced, as well as buybacks of up to £800m which are expected to be completed in the first half of 2023.

The shares fell 7.3% following the announcement.

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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. Net interest margin, which shows the difference between what a bank earns in interest and pays out on deposits, increased from 2.30% to 2.85% over the last year. Coupled with higher mortgage rates, it's led to a healthy boost in total income.

But that higher exposure to interest rates also means NatWest will be affected if rates start to come back down, which will become more likely as inflation falls. Alongside some cautious guidance for 2023, the group's shares have come under pressure.

Impairment charges were recognised in readiness for a higher number of customers defaulting on their loans as the economic outlook worsens. While these came in lower than consensus estimates, they still took a bite out of profits. The extent of future impairments is very hard to predict but may well be severe if conditions deteriorate. A weaker outlook will also make it more difficult to boost the consumer business-lines. Customers can pay down payments faster when things are tough, and that makes earning interest more difficult.

And despite the cost:income ratio - an important efficiency measure - falling significantly this year, we have a close eye on cost control. This is a source of concern over the medium-term, and could see NatWest lag its peers.

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 - which essentially shows how well capitalised banks are - 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 freedom does pave the way for shareholder returns, as shown by the announcement of a £800m buyback programme. But trimming the government's remaining stake in the business will take priority over dividend growth.

NatWest is a natural beneficiary of the higher interest rate environment, and has the financial firepower to navigate changes in the economic cycle. The longer-term picture has some question marks around where meaningful growth might come from.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 17th February 2023