- Margin falls less than feared
- Bank buys Metro mortgage book
- Full-year forecasts increased
After seeing shares in high-street rival Lloyds Banking Group (LLOY) sag yesterday on mixed results, investors in NatWest Group (NWG) had low expectations coming into today’s first-half update so the strong performance came as a pleasant surprise.
The shares, which had already gained more than 50% this year, powered ahead by 8% or 27p to a new post-pandemic high of 365p.
PLENTY OF POSITIVES
For the six months to the end of June, the group posted a 16% drop in pre-tax operating profit to £3.08 billion as mortgage competition ate into loan growth and savers shifted their money into higher-paying accounts.
However, the result was better than expected as the bank’s net interest margin – the difference between the average interest rate it pays on deposits and the rates it charges on loans – fell less than expected and it reduced what are known as risk-weighted assets, which drove its core equity ratio up to 13.6% against the 13.1% consensus forecast.
The firm also announced it would buy £2.5 billion-worth of prime residential mortgages from smaller rival Metro Bank (MTRO) as it looks to build scale in its retail business.
Last month, NatWest agreed to take on around a million new retail customers as it bought the credit card, loans and savings accounts of Sainsbury’s Bank from the supermarket chain.
In terms of impairments for bad loans, the bank wrote back £45 million of charges where the market had forecast it would add around £160 million, so like Lloyds it is taking a rosier view of the UK economy than in the past.
On the minus side, operating costs were higher than expected and the cost-to-income ratio jumped to 55.5% from 49.3% a year ago so there is clearly work to do in bring spending down.
Chief executive Paul Thwaite said customers were feeling ‘more confident, with activity increasing and asset quality remaining strong’ which contributed to the positive first-half momentum.
Thwaite also said he was pleased with the continued reduction of the government’s stake in NatWest, which has almost halved this year and is now below 20% as the new Labour administration tees up the sale of its remaining shares.
RAISED GUIDANCE
As well as posting stronger-than-expected first-half results, NatWest increased its forecasts for full-year group income to around £14 billion against market estimates of £13.8 billion and for return on tangible equity to 14% compared to 12% previously and market estimates of around 13%.
Full-year charges for bad loans are now seen falling to 15 basis points or 0.15% of total loans instead of 20 basis points (0.2%) previously due to the bank’s more positive view on the economy.
‘NatWest’s long recovery from the financial crisis looks meaningful with the company’s latest results including plenty to like from the point of view of shareholders,’ commented AJ Bell head of financial analysis Danni Hewson.
‘Unlike Lloyds, whose better-than-expected numbers received a muted response from the market, NatWest is not only benefitting from lower impairments but also higher than anticipated income and the company not only beat on the second quarter but it is lifting guidance for the full year too.’
However, noted Hewson, Conservative plans to launch a public offer for the remaining government-owned stake in NatWest may not now come to fruition as Labour chancellor Rachel Reeves is reported to be leaning towards selling to institutions instead.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Ian Conway) and the editor (Tom Sieber) own shares in AJ Bell.
LEARN MORE ABOUT NATWEST GROUP
