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NatWest - misses expectations and weaker guidance

NatWest reported a 3.4% rise in underlying income over the third quarter to £3.5bn.

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NatWest reported a 3.4% rise in underlying income over the third quarter to £3.5bn. There was a small uptick in net interest income and a larger gain from the smaller non-interest income line (fees).

Net interest margin (NIM, a measure of profitability in borrowing/lending) fell quarter-on-quarter, to 2.94%, lower than markets were expecting. Full-year guidance has also been lowered, now expected to be greater than 3% (from around 3.15%).

Customer deposits increased £2.4bn quarter-on-quarter, as a dip in current account levels across the client base was more than offset by a rise in longer-term savings balances.

Arrears remained broadly stable and in line with pre-pandemic levels. An impairment charge of £229m was taken over the quarter in expectations for future defaults. Operating profit rose 22.7% to £1.3bn.

The CET1 ratio, a key measure of financial resilience, was 13.5%.

The shares fell 16.4% in early trading.

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Our view

Third-quarter results disappointed. Markets were expecting a dip in net interest margin (NIM - the profitability of borrow/lending), as consumers moved from non/low interest bearing accounts to higher rate longer-term products in search of better returns.

But it was the pace of switching that really took markets by surprise. Deposit levels were positive, as NatWest made an active choice to remain competitive in the rates it's offering. But longer-term (and less profitable) accounts jumping from 11% of deposits up to 15% in a single quarter was a big move. The resulting third-quarter NIM was a good step lower than expected.

NatWest isn't alone in facing this challenge. But as a more traditional bank, interest income is a big part of the pie.

Stepping back a bit, higher rates have been a benefit - and we're seeing that play out in year-over-year growth in profit. But remember markets usually look forward not back, so it's the prospects for the end of this year and into 2024 that move the dial. Management are confident that the drop in NIM over the next quarter won't be as pronounced, and expect things to stabilise into 2024 - but things are looking a little uncertain.

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 a key focus for the new CEO. We've been pleased to see continued progress on reducing the cost:income ratio (Q3 51.4%) - medium-term targets look for sub 50%. 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. Market consensus before results pointed to another c.£450m of buybacks at year end. We wouldn't be surprised if those estimates get revised down - no returns are guaranteed.

NatWest is poised to benefit from some of the structural tailwinds that should lift sector earnings over the medium term. Mortgage pricing is currently a pain point, as more profitable business written over the pandemic is replaced. That should be a headwind that eases over 2024. There's also the benefit from the structural hedge to come through - think of this like a bond portfolio that's set to roll on to better rates over the coming years.

All in, at current valuations the potential for returns look attractive for both the business and shareholders. There's no guarantee, and with an overhang from recent governance issues along with a more uncertain near term, we prefer 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: 27th October 2023