NatWest reported first-quarter income of £4.0bn (£3.8bn expected), up 15%, with strong growth across the board. Net interest margin rose from 2.05% to 2.27%.
Operating profit rose 36% to £1.8bn (£1.6bn expected). That was driven by top line growth, and a 4% drop in operating costs. Impairments of £189mn were higher than expected in anticipation of a weakening economic outlook, default levels remain stable.
The group’s CET1 ratio, a key measure of financial strength, was 13.8% at the period end (13-14% target range).
For 2025, income excluding one-off items is now expected at the top end of the £15.2-£15.7bn range.
The shares rose 3.1% in early trading.
Our view
NatWest has started the year on the front foot. Early gains were pared back a touch as investors question why full year guidance is still below where consensus is sitting ($15.8bn). We think this is management yet again being cautious, a trend we saw throughout 2024, and see scope for income to top the guided range.
As a traditional lender, loan default rates are an important risk to watch for. The good news for investors is that borrowers are remaining resilient, with default rates staying at low levels and expected to stay on that trend.
Mortgage growth was strong over the quarter as buyers got in ahead of stamp duty changes. We see scope for continued good demand over the course of the year, if rates come down as expected. There’s no longer a material margin headwind on mortgages either, which should be positive for interest income.
Deposits make up the other side of the equation, and the trend of savers looking for longer term accounts was a drag in the early parts of 2024. Those higher-rate accounts essentially cost more for NatWest to run, but those trends are now reversing and acting as a tailwind. That's good news for margins - something for investors to monitor.
Costs are a key focus and we've been pleased to see continued progress on this front - medium-term targets look for sub 50% cost-income ratio (Q1: 48.6%). This is a key area that NatWest needs to continue to execute on.
There's also the benefit of the structural hedge - think of this as a bond portfolio that's set to roll on to better rates over the coming years. NatWest is rolling off some of the lowest rates in the sector, and should be one of the biggest beneficiaries. Extra hedge income should be able to offset the impact of any interest rate cuts in 2025, assuming there are no surprises.
The balance sheet is in decent shape, and 2025 could be the year we see the government’s stake brought down to zero (now less than 2%). We think it’ll be taken as a positive signal relating to the group’s strength, and a catalyst to allow some more aggressive strategy moves.
We see NatWest as one of the best-placed UK banks to benefit from several sector tailwinds. Sentiment has rightly improved over the past year after a lengthy period at depressed levels. We think that’s justified and see scope for continued growth, but there’s more pressure to deliver than in a long time and nothing is guaranteed.
Environmental, Social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, NatWest’s management of material ESG issues is strong.
NatWest is resolving some longstanding issues but still faces legal challenges and subpar money laundering policies. Its product management lacks detail and oversight, posing risks under new consumer protection laws. Although there are gaps in data privacy and security, NatWest effectively mitigates cyber threats.
NatWest key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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