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Natwest Group - rising interest rates boost performance

Underlying total income rose 8.6% to £2.8bn, driven by net interest income, which was largely due to increased mortgage lending...

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Underlying total income rose 8.6% to £2.8bn, driven by net interest income, which was largely due to increased mortgage lending. Changes in expectations for the difference between short-term and long-term interest rates also helped.

Pre-tax profit, excluding exceptional items rose to £983m, from £796m. On an underlying basis, NatWest released provisions of £7m, compared to a charge in the earlier period. That reflects better than expected levels of loan defaults, but the group is mindful of the uncertain economic backdrop.

Full year guidance is unchanged, but underlying income is expected to be "comfortably" ahead of £11.0bn.

UK Government ownership of NatWest reduced to 48% in the quarter.

The shares were unmoved following the announcement.

View the latest Natwest share price and how to deal

Our view

Default rates in the loan book have been significantly lower than NatWest had feared. That's resulted in the release of some historical provisions and profits have soared. It's also encouraging to see some alternative sources of income doing well. Things like fees and commission don't rely on interest rates and are a more resilient form of income.

Speaking of interest rates, rate hikes are great news. NatWest relies on rates more than others. Mortgage rates are already being increased, and overall that's resulted in some brighter results. The ongoing work to shrink investment bank, NatWest Markets, means NatWest is generating most of its revenues from interest payments these days too.

We do have some concerns that the bank's customers haven't seemed to respond to the improved economic conditions quite as quickly as at some rivals - with credit card and other secured lending not rebounding as fast. 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.

But for all the moves in the income and profit lines over the last year, it's still the balance sheet that really pops off the page. NatWest's running on a Common Equity Tier (CET1) ratio of 15.0%. That's very comfortable. The planned exit from the Republic of Ireland should free up yet more capital in the coming years.

That inevitably raises questions about what the bank intends to do with the surplus capital going forwards. Dividends and a hefty buyback are back, but we suspect trimming the government's 48% stake in the business will take priority over dividend growth.

The other thing to keep in mind is a weakening economic outlook. Conditions aren't at fever pitch, but a consumer base that's feeling the pinch plus rising rates means there is a lot of uncertainty. A severe economic downturn would be a thorn in the side of all banks.

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.

First quarter results

Total income rose to £1.2bn in the Retail Banking business, from £1.1bn. That reflected higher interest rates, mortgage lending and transaction fees - the latter was because of improved consumer behaviour in the quarter. Retail banking net interest margins improved to 2.43% from 2.25%.

Private Banking income rose almost 17% to £216m, thanks to higher deposit income.

The Commercial & Institutional business now includes Commercial Banking, NatWest Markets and RBS International. Revenue for this segment rose 9.7% to £1.4bn reflecting increased transaction fees and trading income. Net interest margins rose from 2.40% to 2.69%.

Total net loans to customers rose £2.4bn to £126.6bn. Underlying net lending levels rose 5% to £359m.

Underlying operating expenses were broadly flat at £1.8bn.

NatWest's CET1 ratio, which is an important measure of the bank's capitalisation, was 15.0%, excluding accounting changes. This is lower than at the start of the year, largely because of the effects of the share buyback.

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: 29th April 2022