Shares in NatWest (NWG) lost more than 4% in spite of full year results to 31 December 2021 beating earnings forecasts. The shares fell around 10p to 230.1p in Friday trading, getting the UK bank’s reporting season off to a disappointing start.
HSBC (HSBA), Barclays (BARC) and Lloyds (LLOY) are all due to report next week.
It's not easy to put a finger on exactly why the stock is quite so weak in the wake of what appear to be encouraging results. Profit taking is one answer, with the share price up more than 20% since July 2021. Yet the shares have barely budged so far this year.
Perhaps a more likely answer comes from NatWest commentary that said rising prices (inflation) will make it harder to cut overheads, prompting it to lower its cost-cutting target from 4% to 3% for each of the next two years.
Operating expenses were £7.76 billion in 2021, so the implication is about £80 million less stands to be knocked off costs this year and next.
PROFITS GROWING AGAIN
NatWest reported adjusted pre-tax profit £5.24 billion for 2021, ahead of the £4.98 billion consensus forecast, partly helped by releasing more stored cash from its bad debt provisions.
Reported earnings per share of 25.4p also beat the consensus estimate of 23.7p. The full year dividend of 10.5p compared with expectations of 9.4p. Reported return on tangible equity of 9.4%, was marginally ahead of consensus forecast of 9%.
NatWest also plans to buyback £750 million shares this year.
Management upgraded guidance with a new return on tangible equity target ‘comfortably above 10%’ for the full year 2023. This compares with the previous 9% to 10% guidance.
Two factors are expected to drive this improved performance. The first is improved income, and the second is an anticipated improvement in the impairment ratio.
Management maintain this will come down to a range of 20 to 30 basis points, compared to a previous level of 30 to 40 basis points.
RATE RISE CONUNDRUM
Given the UK’s rampant inflation, more Bank of England rate hikes look likely, potentially playing into NatWest's hands through higher loan charges.
Yet rises in the cost of living could also slam the brakes on consumer spending and shoppers’ willingness to take on debt. It could also increase the volume of bad debts if Brits find repaying existing loans harder.
Research by Jefferies claims that NatWest is the stand out winner from interest rates rises. For example, the recent 25 basis points rate rise by the Bank of England will result in a 5.5% uplift to its net interest income.
Not all analysts agree that NatWest is in prime position in the UK sector, with Shore Capital analyst Gary Greenwood preferring Barclays and Standard Chartered (STAN).
