- Top and bottom line beat forecasts
- Fall in deposits unnerves investors
- Analysts disappointed at unchanged guidance
Given the rapturous reception for Barclays (BARC) yesterday after its first-quarter earnings beat forecasts, shareholders in NatWest Group (NWG) were no doubt hoping for a similar response today.
Unfortunately, as is often the way, the market decided that while the numbers were good, they weren’t quite good enough, and marked the shares down 17p or 6% to 255p making them the worst performer in the FTSE 100 benchmark.
WHY ARE NATWEST SHARES DOWN?
At first glance there wasn’t much wrong with the first quarter results, as total income climbed 29% to £3.88 billion driven by a 43% increase in net interest income to £2.9 billion.
Operating costs were kept in check, rising just 9% to £1.99 billion, and the bank took just £70 million of impairment losses during the quarter, underlining its confidence in its asset quality.
The Common Tier One equity ratio was 20 basis points or 0.2% higher than the year-end at 14.4% and the return on tangible equity was a remarkable 19.8% as attributable profit rose 52% from £841 million to £1.28 billion.
So far so good, however the bank’s net interest margin only grew by 7 basis points or 0.07% between December and March to 3.27% which was 10 basis points below market expectations and hinted at a fall in deposits.
Sure enough, a little look further down the trading statement reveals customer deposits dropped from £483 billion a year ago and £450 billion in December to £430 billion at the end of March as savers moved their money to higher-paying accounts at rival banks.
WHAT DID ANALYSTS SAY?
‘With deposits continuing to fall and a negatively sloped yield curve in the UK, there is a likelihood of a more challenging net interest revenue environment going forward’, said Robert Murphy, head of financials research at Edison Group.
That could explain why, despite such strong revenue and profit growth during the quarter, management left its full-year guidance unchanged, suggested Murphy.
Joseph Dickerson, financials analyst at Jefferies, agreed the lack of change to the full-year outlook – and therefore the potential to upgrade forecasts – was disappointing.
‘Management really needed to raise the 2023 revenue guide from £14.8 billion to around £15 billion given the incremental 25bps rate hike and higher swap rates.
‘Indeed, the retained guidance now assumes a 4.25% base rate whereas the guide at the end of 2022 assumed a 4.00% base rate. Management's rate sensitivity disclosures indicate ~£200m of higher income related to a 25bps hike.’
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