Proactive Investors - Investors banking on the high street lenders to deliver this reporting season will be nursing heavy losses after NatWest Group PLC (LON:NWG) followed Barclays PLC (LON:BARC) in disappointing those in the square mile.
Shares in NatWest tumbled 6% after the bank suggested the profit boost from rising interest rates could be over, warning net interest margins may have peaked, sending City scribes dashing for the red ink with profit forecasts set to fall.
Still, investors could always shift their cash into one of NatWest’s tempting savings accounts where you can earn a whopping 0.65% in a Flexible Saver account (up to £24,999, T&Cs apply of course).
This marked differential between mortgage rates, loan rates and savings rates prompted MPs on the Treasury Select Committee to recently haul bank bosses to account.
MPs said their constituents complained that mortgage rates rose more rapidly than the returns offered to savers when the base rate went up.
Unsurprisingly bank bosses denied this – to summarise, there are better rates out there, you just need to look for them. Nothing to see here.
But as Russ Mould at AJ Bell pointed out “NatWest’s rescue by the state during the financial crisis means criticism of its tardiness in passing on higher interest rates to savers arguably carries more weight and that could have some impact on profitability.”
Savings matter to most people but maybe not as much to NatWest chief Dame Alison Rose who trousered £5.2mln in pay in 2022, becoming the bank’s second-highest-paid boss after the controversial ex-banker Fred Goodwin, All part of her long-term incentive plan, NatWest said.
NatWest also upped its total bonus pool for bankers to £367mln from £298mln.
Remember this is a bailed out bank, still owned 44% by the taxpayer. But that’s for another day.
Unite general secretary Sharon Graham said: “It’s offensive that government ministers are insisting NHS workers take another savage pay cut while their big City banker friends are given carte blanche to make billions.”
Strong words and the political hot potato of a windfall tax may explain some of NatWest’s caution today. Because on a day when the share price has fallen sharply some perspective is required.
Back to the results to show why. In 2022 NatWest posted operating pre-tax profits in the 12 months to December 31 of £5.13bn from £3.84bn the year before, broadly in line with City expectations, while total income jumped to £13.16bn from £10.43bn.
It pledged a new £800mln share buy-back and lifted the total dividend to 10p from 7.5p a year before. Healthy numbers.
The issues – well the issues for the share price today - come looking forward. NatWest’s forecasts for income, costs and margins were worse than expected slightly offset by better news on bad debts.
As AJ Bell’s Russ Mould noted “NatWest may have delivered its biggest profit since the financial crisis but investors are far more concerned about what’s coming next and that’s less positive.”
Analysts at UBS suggested this could prompt a 5% downgrade to profit forecasts while Jefferies said the guidance implied a lower pre-provision profit of around £580mln from the current consensus.
Still, before today’s update UBS had pencilled in pre-tax profits of £6.14bn for 2023 so even with a 5% cut, profits are growing comfortably.
This is also based on NatWest’s assumption that interest rates stay at 4% and there has to be a degree of uncertainty here with the City split on whether the Bank of England will hike rates further.
Jefferies noted that every 25bps move in rates equals £198mln in income in the first year so any upward move by the Bank would provide some slack to the current guidance.
Indeed, given its rival Barclays said earlier in the week that UK net interest margin would be greater than the 3.20% NatWest expects, perhaps Rose is being a tad cautious.
For UBS “the key medium term issue is whether NatWest can realistically deliver a 14-16% return on total equity as net interest income likely falls on lower rates.”
“In 2024 the elimination of Ulster will do much of this work but later it'll be tougher, we think.”
“If successful, the share still looks good value but risks to delivery are higher than we thought,” UBS analysts wrote.
So is a 6% share price fall justified. Richard Hunter, head of markets at interactive investor, was perplexed and took a more upbeat view “For the moment NatWest is delivering across the board, while also remaining prudent in the use of its excess capital,” he commented.
Even after today’s fall NatWest’s share price has risen 5.6% in the year to date and by 11% in the past 12 months.
So no the good times aren’t over, the profits will keep flowing and the money rolling in.
They just never arrived for savers.