Shares in NatWest Group (NWG) fell by 4.5% to 212p, despite the group announcing first quarter results to 31 March 2022 with profits well ahead of market expectations.
Management has upgraded full year income guidance and anticipates this will be above £11 billion.
However the market has focused on the cautious comments made by the company regarding the uncertain economic outlook due to the cost of living crisis.
Reported profit before tax increased by 38% year-on-year to £1,287 million ahead of a consensus figure of £873 million.
Reported earnings per share rose by 47% year-on-year to 7.5p, versus a consensus forecast of 4.6p.
No interim dividend was proposed, which was in line with expectations. There was no news regarding an additional share buyback or special dividend.
The tier 1 capital ratio of 15.2% was below a consensus forecast of 15.6%, but the reported return on tangible equity of 11.3% was considerably ahead of a 6.3% consensus figure.
INTEREST RATES A DOUBLE EDGED SWORD
NatWest finds itself in a difficult position given the current economic environment.
The resurgence in inflationary pressures has resulted in the Bank of England being forced to raise interest rates. This process is likely to continue when it next meets (5 May 2022).
On the one hand, NatWest is a beneficiary of rising interest rates.
In a rising interest rate environment banks are able to increase their net interest margins, (the difference between the rate at which they fund their lending, and the amount they charge to borrowers).
Research by Jefferies, has shown that NatWest Group is the stand out winner from interest rates rises. For example the recent 25 basis points rate rise, resulted in a 5.5% uplift to its net interest income.
However NatWest chief executive Alison Rose believes ‘We are also very aware of the challenges and concerns the cost-of-living crisis is causing for many of our customers up and down the country’.
Interest rate increases increase the likelihood that borrowers will default on their loans and mortgage repayments.
Indeed, the market at present appears to be more focused on a potential deterioration in the credit cycle on NatWest’s future profitability, rather than reported earnings exceeding forecasts.
Shore Capital analyst Garry Greenwood believes ‘NatWest currently offers 21% upside to our published fair value of 270p’.
