NatWest Group plc (NWG) Ord GBP1
HL comment (29 October 2021)
Total income rose 14.5% to £2.8bn in the third quarter, as loans to customers rose 2% to £361m, and there was a 65.0% increase in non-interest income to £820m.
The group was able to release £242m of the provisions put aside last year, in case customers defaulted on their loans. Compared to a charge of £254m last year, together with higher income and reduced costs, this meant pre-tax profit jumped from £355m to £1.1bn.
NatWest has put aside £294m for litigation issues, including an "anticipated fine" relating to money laundering regulation breaches.
The shares fell 3.6% following the announcement.
The ongoing work to shrink investment bank, NatWest Markets, means NatWest (formerly RBS) is generating most of its revenues from interest payments these days.
Generally, that makes for a more stable source of revenue, but at the moment it has the potential to cause headaches. With interest rates on savings accounts already on the floor, banks can't push funding costs much lower. But competition and regulatory action means the interest rates it can charge borrowers are falling. That's an unpleasant combination for loan profitability.
The good news is that default rates in the loan book have been significantly lower than the bank had feared. That's resulted in the release of some historic provisions and profits are soaring. It's also encouraging to see alternative sources of income doing so well. Things like fees and commission don't rely on interest rates and are a more resilient form of income.
The other bright spot is that interest rates are expected to rise in the near future, which would be very welcome, given Natwest relies on rates more than others. Mortgage rates are already being increased, but the effects of this won't feed into results until the full year mark.
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 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 18.7%. That's ludicrously high. 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 billions in surplus capital going forwards. Dividends are back, but we suspect trimming the government's 55% stake in the business will take priority over dividend growth. The bank has approval to buy up to 4.99% of its share back from the government each year.
The stubbornly low interest rate environment will hamper income growth until a rate announcement's made. However, investing is a long-term game, and a balance sheet awash with capital should allow NatWest to weather a spell of lacklustre results. 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
- Price/Book ratio: 0.64
- 10 year average Price/Book ratio: 0.58
- Prospective dividend yield (next 12 months): 4.1%
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.
Third quarter results
It was a mixed bag across Natwest's various divisions. Total income rose in the retail banking business, private banking and the International Banking & Markets arm of RBS. While commercial banking saw a decline.
Natwest had net interest income of £2.0bn, up slightly on £1.9bn last year. Net lending levels excluding government support schemes rose £2.9bn, largely because of increased mortgage lending. The net interest margin fell to 1.44% from 1.51%, excluding the investment bank, Natwest Markets, net interest margins were 1.54%.
An increase in fees and commission helped other income rise, but the increase was largely because of the non-repeat of a loss from Natwest's debt last year.
Operating expenses rose 7.1% to £1.9bn. The group's cost:income ratio fell to 69.6% from 74.5% a year ago.
Natwest's CET1 ratio, which is an important measure of the bank's capitalisation, was 18.7% up slightly from 18.5% a year ago. The increase reflects increased profits and a reduction in risk weighted assets.
The release of provisions, which boosted profits, means the group's return on tangible equity went from 0.8% to 8.5%.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.
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