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NatWest - first-quarter earnings ahead of expectations

NatWest reported 28.9% growth in total income to £3.9bn, just ahead of analyst expectations. Growth was almost entirely driven by...

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NatWest reported 28.9% growth in total income to £3.9bn, just ahead of analyst expectations. Growth was almost entirely driven by higher net interest income, as net interest margin (NIM, a measure of the profitability of lending and borrowing) rose from 2.45% to 3.27% due to higher interest rates.

Levels of default remain low, and the group took a £70m charge in preparation for bad debt. That was lower than analysts expected. Pre-tax profit rose 48.5% to £1.8bn.

The CET1 ratio (a vital balance sheet metric) was 14.4%, down from 15.2% the prior year but still well ahead of the regulatory required level.

Guidance remains unchanged, with underlying income expected to be around £14.8 billion and full-year NIM around 3.20%, based on a Bank of England base rate of 4.25% through the remainder of 2023.

As of 26 April 2023, £458m of the £800m share buyback programme had been completed.

The shares fell 4.2% in early trading.

See the latest NatWest share price, charts and how to trade

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, a measure of the profitability of lending and borrowing, crept higher to 3.27% - enough to drive healthy profit in the first quarter.

But that seems to be as far as it will go, and markets haven't reacted kindly to full-year guidance, which remained at 3.2%. That's despite UK base rates being higher than when those figures were first announced. This is where high rate sensitivity is a double-edged sword. Stability is what markets like, and it's unclear yet at what pace rates will come back down. Faster than expected would be a hit to NatWest in particular.

On a more positive note, provisions set aside for debt defaults were better than first thought. This is an ongoing trend for the major UK banks, somewhat bucking the idea that the global banking system is in troubled water. Default levels across the portfolio remain low and NatWest boasts one of the lowest levels of higher-risk unsecured lending in the sector.

Yes, there was an outflow of customer deposits over the quarter, but it's not cause for too much concern. Consumers shopping around for the best rates isn't much of a surprise, given they've spent years getting little to nothing from their cash deposits.

Costs are an ongoing point of note, and we've been pleased to see continued progress on reducing the cost:income ratio - an important efficiency measure. Yet, costs were ahead of expectations over the first quarter and keeping them low is the next challenge. This remains a point of potential weakness in a high-inflation world.

Running on a Common Equity Tier (CET1) ratio - which essentially shows how well capitalised banks are - of over 14% is very comfortable. That paves the way for shareholder returns, as shown by the ongoing £800m buyback programme. We expect some degree of caution on returns while the environment is uncertain and there are no guarantees.

NatWest is taking advantage of the current environment, and the ongoing return on tangible equity (ROTE) target of 14-16% is attractive and achievable. When you add in the 6.7% forward yield and buyback, the potential returns to shareholders at this valuation is still worth a look. Our main concern is how the Group will perform if and when interest rates become a headwind, and we see more resilience in that environment from other names in the sector.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 28th April 2023