The UK banks’ reporting season is off to a flying start, with NatWest (LON:NWG) displaying a pleasing mix of lending and income growth, a tight focus on costs and a reward to patient shareholders with a further increase to the dividend.
In addition, and as trailed, the new Chief Executive has been confirmed, removing a plank of uncertainty and potentially opening the door to a retail share sale later this year. The government holding, which currently stands at 35%, has been an overhang on the shares for some considerable time and its sale would leave the bank free of these shackles. The results today should certainly strengthen the investment case and increase the appeal to retail investors, although the level of the discount to the prevailing share price will be critical in attracting new buying interest.
The numbers themselves show few causes for concern. Overall profit of £4.6 billion represented an increase of 28% on the previous year, with pre-tax operating profit jumping by 20% to £6.2 billion. Total income of £14.3 billion was in line with estimates and 8.8% higher than the corresponding period. While mortgage lending inevitably fell given the economic backdrop from £41.4 billion to £29.8 billion, loans to retail banking customers increased by £7.6 billion.
The increase in loans also gives a nod to potential customer defaults, with a further provision of £126 million taking the total for the year to £578 million. Even so, the number remains significantly lower than that of its peers and, for some, will be a reflection of the generally lower risk loan book which the bank runs. NatWest has itself stated that levels of default are stable and had previously described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain, such that the new provision is a prudent move in the circumstances.
Other key metrics are solid, with the Return on Tangible Equity (ROTE) possibly the largest beat, coming in at 17.8% against the previous year’s level of 12.3%. The bank is mindful that the likelihood of lower interest rates in the coming year will have an impact, and has cautiously guided for a level of nearer 12% to come as a result. Meanwhile, the capital cushion or CET1 ratio, stands at 13.4% which, while lower than the previous 14.2%, remains comfortably in excess of regulatory requirements. Net Interest Margin, which had been the source of some disappointment at the third quarter update, came in at 3.04% for the year, compared with a previous 2.85% and helped along by Net Interest Income of £11 billion, up by 12.3%.
The cost/income ratio, excluding litigation and conduct, was in line with the group’s own estimates at 51.8% and showed an improvement from the previous year’s level of 55.5%. The increasing migration of customers to digital platforms and the subsequent reduction in branch footprint are clearly playing into reducing costs, with the bank reporting that 9.8 million customers are now using its mobile app. In addition, it estimates that 94% of its customers’ needs are now being met digitally, as compared to 53% in 2019.
The stability and strength of the balance sheet has enabled further management signs of confidence in prospects, with the announcement of a £300 million share buyback scheme and a further increase to the dividend which propels the projected yield to a punchy 7.9%. Herein lies the minor causes of complaint from these numbers, with a higher buyback number expected. The more cautious guidance on income for the forthcoming year may also have played a part in a slightly weaker opening price, along with a drop of 3.2% in deposits as customers seek the ultimate returns on cash balances after some years in the doldrums. Even so, some of the estimate beating performances, particularly on ROTE and especially in the fourth quarter, are limiting any disappointment.
In all, these are a robust set of results which underpin prudence, growth and financial largesse to shareholders. However, the share price has tended to be dogged by the general outlook for the UK economy, and despite a small bounce over the last three months, the shares remain down by 29% over the last year, which compares with a decline of 5.2% for the wider FTSE100. Bulls of the stock are for the most part looking through the limitations of the UK’s position in the current economic cycle and taking a longer view, such that the market consensus of the shares as a buy is most likely to remain intact.