NatWest Group plc (NWG) Ord GBP1
HL comment (19 February 2021)
NatWest reported total income for the full year 2020 of £10.8bn, down 24.3% on last year. Together with a substantial increase in provisions for bad loans that meant the bank reported an operating loss of £351m for the year, down from a £4.2bn profit a year ago.
The bank announced a final dividend of 3p per share. Going forwards the group plans to pay out around 40% of profits as an ordinary dividend, with a minimum of £800m a year paid in ordinary and special dividends from 2021 - 2023.
NatWest shares fell 1.7% in early trading.
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 just at the moment it's causing a lot of pain. 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 possibility of negative interest rates from the Bank of England would be uncharted territory, but would most likely make matters worse.
It doesn't help that borrowers are also shifting the types of lending they're interested in. Mortgage lending has accelerated and the bank's large SME customer base has drawn some £13bn from government supported coronavirus lending schemes. However, both of these are relatively low interest rate products -since they're low risk for the banks. With nervous consumers paying down higher interest credit-card and overdraft debt the make up of the bank's loan book is less profitable.
The extra borrowing has come at the same time as an expected increase in bad loans, with the bank putting aside billions to cover expected losses. Outsized exposure to small business loans meant many expected NatWest to top up its provisions towards the end of the year. So far NatWest's customers have held up rather well and that hasn't been necessary - although it remains to be seen what will happen when government support is withdrawn.
But while the income and profit lines are moving around a lot at the moment, it's the balance sheet that really pops off the page. At the full year NatWest reported a Common Equity Tier (CET1) ratio of 18.5%. That's ludicrously high - reflecting both internally generated capital as well as the decline in "risk weighted assets" or "RWAs" which forms the dominator of the CET1 ratio. The planned exit from the Republic of Ireland should free up yet more capital in the coming years - with a EUR4bn loan book already earmarked for sale.
NatWest might be justifiably peeved at being ordered by the regulator not to pay dividends last year when its balance sheet is practically overflowing with capital. However, the real question is what the bank intends to do with something in the region of £7.6bn of surplus capital going forwards. Dividends are back, but we suspect trimming the government's 62% stake in the business is also at the top of the list. The bank has approval to buy up to 4.99% of its share back from the government each year
The risk of the UK economy nosediving, and bad loans mounting remain substantial. And the stubbornly low interest rate environment will hamper income growth for some time. However, investing is a long-term game, and a balance sheet awash with capital should allow NatWest to weather a spell of poor 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: 0.48
- 10 year average Price/Book ratio: 0.58
- Prospective dividend yield (next 12 months): 5.1%
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.
Full Year Results
Net interest income for the year fell 3.7% to £7.7bn. That reflects a 10.3% increase in loans to customers, reaching £360.5bn, offset by a lower net interest margin which fell from 1.99% to 1.71% (excluding NatWest Markets).
Non-interest income fell 41.5% to $3.0bn. That largely reflects the non-recurrence of gains on disposal last year and FX gains. Looking just at changes within the bank's operating segments non-interest income fell 17.4%, mostly because of the effect of covid-relief measures on Retail Bank fee income.
NatWest registered bad loan provisions during the year of £3.2bn (2019: £696m), with commercial banking accounting for £1.9bn. The bank also saw loans to commercial customers increase by £7bn, reflecting £12.6bn of lending under government backed schemes.
Total operating expenses fell 15.2% to £7.9bn, reflecting declines across litigation and conduct, restructuring and staff costs. However, the more rapid decline in income meant the bank's cost:income ratio increased to 72.9% (2019: 65.1%).
NatWest's CET1 ratio (a key measure of banking capital) rose to 18.5% (2019: 16.2%). That reflects a decline in Risk Weighted Assets, the non-payment of dividends in 2020 and changes to regulatory relief.
The bank reported a return on tangible equity of -2.4% for the year.
Alongside results NatWest announced that it would be exiting the Republic of Ireland - with plans to sell or close its Ulster Bank operations in the Republic.
Management expect conditions to improve in the latter half of 2021, as employment and economic growth in the UK improve. However, they also warned that significant uncertainty remains.
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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