- Quarterly earnings top forecasts
- Credit quality holding up for now
- 2024 revenue guide disappointing
By most standards, NatWest’s (NWG) fourth-quarter results were ahead of expectations, which ought to have supported the share price, but the market’s initial reaction was to mark the shares down 3% to 207p.
After some nifty spin-doctoring, however, the shares are now trading 3% higher at 221p.
STRONG FINISH TO 2023
For the final three months of last year the bank reported total income of £3.57 billion, 4.6% lower than the previous year but still ahead of the £3.39 billion consensus.
Net interest income of £899 million was comfortably ahead of the average forecast of £801 million, while provisions for bad loans were just £126 million against market estimates of £233 million reflecting ‘continued low and stable levels of defaults across the portfolio and good book charges related to unsecured lending’ according to the bank.
‘Despite the macroeconomic uncertainty, our customers remained resilient, navigating both inflation and rising interest rates,’ said newly-appointed chief executive Paul Thwaites.
The bank’s net interest margin, or the spread between the rate it charges on loans and the rate it pays on deposits, rose 0.19% to 3.04%, above its forecast of 3% after it lowered its sights last October sending shares to a two-year low.
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LESS UPBEAT FOR 2024
Taking some of the shine off its final 2023 results was a somewhat gloomy 2024 revenue forecast of £13 billion to £13.5 billion, down as much as 9% from last year’s £14.3 billion, as customers continue to switch from non-interest accounts to fixed-rate accounts to take advantage of higher base rates.
The bank also forecast a tangible return on equity for this year of 12% compared with last year’s 17.8% and its own medium-term 14% to 16% target and withdrew its net interest margin guidance.
There was no mention of provisions for potential claims in the motor finance business, although Lombard is a key credit provider, but the bank said it saw group operating costs excluding litigation and ‘conduct’ costs at the same level as last year.
EXPERT VIEWS
Joseph Dickerson, banks analyst at Jefferies, pointed out that excluding one-offs NatWest’s fourth-quarter profit was 2% ahead of forecasts rather than the headline 10% number, but the focus was likely to be on the outlook.
‘The rub is in the guidance, where investors will be frustrated by a lack of net interest margin guidance given the £13 billion to £13.5 billion 2024 revenue guide compares to consensus of £13.7 billion, which is partially offset by a better guide on credit costs of sub 20 basis points. According to our calculations, the net effect would imply around 4% off consensus pre-tax earnings forecasts.’
Will Howlett, financials analyst at Quilter Cheviot, commented: ‘The bank’s guidance for 2024 was cautious, reflecting the uncertainty of the economic outlook and the impact of five anticipated rate cuts by the Bank of England. Base rate reductions also weigh on the return on tangible equity target of over 13% in 2026, which compares with the prior medium-term target of 14-16%.
‘However, we think this remains a healthy level of profitability against the assumed base rate of 3%, particularly with the shares trading at 0.7x tangible book value.’
