NatWest reported third-quarter income of £3.7bn, up 7.3%, driven by lending and deposit growth and margin expansion. Net interest margin rose from 2.05% to 2.18% (consensus 2.10%).
Pre-tax operating profit of £1.7bn was up 26%. That was driven by the top-line growth and a 5.3% drop in operating costs. Impairments of £245mn were up 7.0% and above consensus, though default levels remain low.
The group’s CET1 ratio, a key measure of financial strength, was 13.9% at the period end (13-14% target range).
Full-year guidance has been upgraded, now expecting net interest income of £14.4bn (previously £14bn).
The shares rose 3.8% in early trading.
Our view
NatWest is having a good run of late, with third-quarter trading beating expectations and marking continued progression as conditions for UK banks look promising.
As a traditional lender, loan default rates are an important risk to watch for. Impairment charges (money put aside in anticipation of more people defaulting on loan payments) were worse than expected this quarter. But that was in part due to a single borrower, and importantly default rates, remained at stable and low levels.
Deposits make up the other side of the equation, and the trend of savers looking for longer term accounts has acted as a drag for several quarters. Those higher rate accounts essentially cost more for NatWest to run, but we are seeing those trends now stabilise. That's good news for margins - something for investors to monitor.
Costs are a challenge and a key focus for the new CEO. We've been pleased to see continued progress on this front - medium-term targets look for sub 50% cost-income ratio but we don't expect that to come anytime soon.
Mortgage pricing has also been a pain point in recent quarters, as more profitable business written over the pandemic was replaced. But that headwind won’t be material moving forward, as the spread (profitability) of new business and existing business is now the same.
There's also the benefit of the structural hedge - think of this as a bond portfolio that's set to roll on to better rates over the coming years. NatWest is rolling off some of the lowest rates in the sector, and should be one of the biggest beneficiaries.
We’ve been pleased to see the income guide pushed higher for the past two quarters, as management have adjusted the number of rate cuts they expect and built in better underlying performance. The new full-year guide will be harder to beat, but we do still see a small amount of upside here.
We see NatWest as one of the best-placed UK banks to benefit from several sector tailwinds. The investment case is further supported by the 5.2% prospective future yield and potential for buybacks, backed up by the strong balance sheet. But no returns are guaranteed, and the valuation isn’t as attractive as it was earlier this year as sentiment toward the sector has improved.
Environmental, Social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, NatWest’s management of material ESG issues is strong.
NatWest is resolving some longstanding issues but still faces legal challenges and subpar money laundering policies. Its product management lacks detail and oversight, posing risks under new consumer protection laws. Although there are gaps in data privacy and security, NatWest effectively mitigates cyber threats. Last year’s governance issues relating to CEO conduct still weigh on sentiment, though a new Chair and CEO are now in place.
NatWest key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.