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NatWest - higher than expected impairment charge

Total income rose 20.2% to £3.2bn in the third quarter, largely reflecting higher net interest income, which makes up the bulk.

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Total income rose 20.2% to £3.2bn in the third quarter, largely reflecting higher net interest income, which makes up the bulk. Net interest income is benefiting from higher interest rates, which makes lending more profitable. Non-interest income fell around £330m to £589m.

Operating expenses remained broadly flat. The group recognised an impairment charge of £247m in expectation of a higher rate of loan defaults. That charge was bigger than expected and meant pre-tax profits rose more slowly than income, reaching £1.1bn from £976m.

The CET1 ratio, which is an important measure of how well-capitalised a bank is, was flat compared to the second quarter at 14.3%.

Looking ahead, NatWest expects costs to increase, not remain flat as previously guided, because of inflation. Impairment charges are also expected to worsen.

The shares fell 7.7% 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. Mortgage rates are higher, and overall that's resulted in some brighter results.

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 across the group.

The development that's really disappointed markets is impairment charges - these have been recognised in readiness for a higher number of customers defaulting on their loans as the economic outlook worsens. These charges are expected to increase in the coming quarters, and that will dent profits. The extent of these 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.

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, but trimming the government's remaining stake in the business will take priority over dividend growth.

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.

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: 28th October 2022