By Iain Withers and Lawrence White
LONDON (Reuters) - NatWest Group (L:NWG) plunged into the red in the first half of the year after setting aside a fresh 2.1 billion pound provision against a potential surge in loan losses due to the COVID-19 pandemic.
The state-backed bank follows British rivals Barclays (LON:BARC) and Lloyds (LON:LLOY) this week in booking hefty charges for possible bad debts, painting a gloomier picture of the economic outlook than peers in most other European countries.
"With the UK banking season nearly complete, NatWest's statement adds to the downbeat tone heard this week," said Donald Brown, senior investment manager at Brewin Dolphin.
NatWest's quarterly provision came in above analysts' expectations of 1.7 billion pounds, pushing the total taken over the half year to 2.9 billion pounds and dragging it to a 770 million pound pretax loss.
The newly rebranded bank - which ditched its Royal Bank of Scotland group name earlier this month - remains 62% owned by taxpayers following its bailout in the 2008-09 financial crisis.
The lender said it was still aiming to shrink its minnow investment bank NatWest Markets this year, despite a 44% rise in income over the period amid market volatility due to the pandemic. Income in its main retail business fell by 9%.
NatWest's shares were up nearly 3%, slightly ahead of a broader rally in the STOXX European banks index (SX7P), as investors took comfort in a jump in the bank's core capital buffer to 17.2% - a key indicator of financial strength.
ESTIMATING THE DAMAGE
While banks have been hit hard by bad loan provisioning so far, much of the charges reflect their estimates of likely defaults as the economy deteriorates, under forward-looking accounting rules known as IFRS9.
NatWest forecast the UK economy could contract by between 9% and nearly 17% this year under best-to-worst case scenarios.
"The speed of the recovery of the economy... and the underlying scarring we don't know yet, so what we're doing is taking a very prudent view of what the outlook is," NatWest Chief Executive Alison Rose told reporters.
The worst-case scenario reflected the risks of both further lockdowns to control the spread of the virus and a "disruptive" Brexit if Britain leaves the European Union without a deal at the end of the year, finance director Katie Murray said.
Analysts have said the true extent of the damage to bank balance sheets will not become clear until later in the year, when state support schemes such as furlough job retention payments taper off.
NatWest said it had lent more than 10 billion pounds of state-backed emergency relief funding to businesses and granted payment holidays to almost a quarter of a million consumers struggling to repay debts.
Prior to the pandemic the bank had hoped to use its excess capital to help buy back government-owned shares and accelerate its return to private hands, but a dive in bank stocks since the crisis has put this back.
NatWest's market value has more than halved this year.
The bank's chairman Howard Davies said: "We are not holding our breath in expectation of an early share sale."