NatWest (LON:NWG) has been able to flex its financial muscles once more, outpacing expectations and maintaining its guidance for the year.
After a particularly strong start to the corresponding period last year, it is unsurprising that the headline numbers are lighter this time around. Even so, both of the key measures are ahead of forecasts. Total income of £3.47 billion was down by 10% but ahead of the expected £3.43 billion, while a pre-tax profit decline of 27% to £1.33 billion beat estimates of £1.26 billion.
Income has been affected on a number of fronts, such as lending margin pressure and lower deposit balances as customers search for higher rates of return after years in the doldrums. Nonetheless, the situation appears to be stabilising and the group has pointed to the fact that both net lending and customer deposits rose in the quarter. Of course, it remains to be seen whether this trend becomes established.
The increase in loans also gives a nod to potential customer defaults, with a further provision of £93 million, although the number remains significantly lower than some of its peers. It may also reflect the generally lower risk loan book which the bank runs and NatWest has itself stated that levels of default are low and stable. previously describing 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.
In relative terms, there were also other pockets of positive surprises. Net Interest Income of £2.65 billion, while 8.6% lower, was ahead of the guided £2.56 billion and the Net Interest Margin of 2.05% was ahead of both consensus as well as the previous quarter’s 1.99% number. A Return on Tangible Equity of 14.2% fell from 19.8%, but nonetheless was ahead of the ROTE figures which have been reported by competitors so far this season.
Given the backdrop, the balance sheet remains in rude health. A capital cushion, or CET1 ratio of 13.5% is comfortably ahead of the bank’s own target, while a cost/income ratio of 58.4% suggest an ongoing focus on efficiency. Indeed, the increasing migration of customers to digital platforms and the subsequent reduction in branch footprint are clearly playing into reducing costs, with the bank previously reporting that 9.8 million customers were now using its mobile app and that 94% of its customers’ needs are now being met digitally, as compared to 53% in 2019. In addition, while there was no updates on potential share buybacks at this stage as expected, a dividend yield of 5.9% is relatively punch compared to the rest of the sector.
The Commercial & Institutional unit, which accounted for 58% of the operating profit played a strong hand in the quarter, with growth coming from “multiple sectors” including an increase in lending and strong capital markets, and a ROTE of 14.6%. This led to operating profit of £769 million for the quarter, compared to £725 million in the final quarter of last year, while a mild reduction to customer deposits did little to blight the overall performance.
There had perhaps been an expectation that there would be an update on the potential retail offer for the government’s remaining stake in NatWest, which now stands at around 30%. Instead, the group stated that it was pleased with the recent momentum in reduction of the stake, edging towards the “shared ambition” of returning NatWest to private ownership. Even so, there is much for investors to appreciate in a generally strong set of numbers, which has received a warm welcome in opening exchanges. The share price bounce adds to a net increase of 8% over the last year, as compared to a gain of 2.9% for the wider FTSE100, and is further evidence of the momentum which has propelled the price by 40% in the last six months alone. NatWest has again delivered an outcome which should mean that it retains its spot as the preferred play on the sector, with a market consensus which comes in at a strong buy.