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NatWest - interest margin guidance pulled down, buyback announced

NatWest reported a 24% rise in half-year income to £7.7bn, driven largely by the higher interest rate environment...

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NatWest reported a 24% rise in half-year income to £7.7bn, driven largely by the higher interest rate environment.

Net interest margin (a measure of profitability from lending/borrowing) rose from 2.58% to 3.20%. But, the 3.13% delivered in the second quarter was below expectations, as depositors shift to higher-rate accounts which are less profitable. Guidance for the full year was pulled down from 3.20% to 3.15%.

In preparation for higher loan defaults, a £223m charge was taken over the half. That was lower than expected and default levels are remaining low and stable for now. Pre-tax operating profit rose from £2.6bn to £3.6bn.

The CET1 ratio (a measure of financial resilience) ended the period at 13.5%. That's paved the way for a new £500m buyback over the rest of the year. A dividend of 5.5p was also announced.

The shares were broadly flat in early trading.

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

Our view

It was a shame to see the now former CEO Alison Rose leave due to a misguided comment to the press. As a highly regarded banker and long-time NatWest employee, her leadership will be missed. Nevertheless, things must go on and we turn attention to recent results.

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, of 3.20% over the half was enough to drive healthy profit growth.

But it looks like things have peaked. There was a quarter-on-quarter dip in margins and full-year guidance has been given a slight downgrade, as depositors shift from higher-margin current accounts in search of better rates. 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.

On a more positive note, provisions set aside for debt defaults were better than first thought and full-year guidance remains intact. This is something to keep a close eye on, but default levels are staying low for now. Risks here tend to be lower given it boasts one of the lowest levels of higher-risk unsecured lending in the sector.

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. Keeping costs in check is an ongoing challenge, especially in a high-inflation world.

Running on CET1 ratio - which essentially shows how well capitalised banks are - of 13.5% is still very comfortable. That paves the way for shareholder returns, as shown by the new £500m 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 7.8% forward yield and buyback, the potential returns to shareholders at this valuation are still worth a look.

We're not there yet, but our main concern is how performance holds up if and when interest rates become a headwind, given the benefits now look to have peaked. There's also the ongoing risk that economic conditions end up worse than expected.

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 July 2023