Net interest income was down, offset somewhat by a gain from the smaller non-interest income line (fees). Operating profit fell 11.9% to £1.3bn.
Net interest margin (NIM, a measure of profitability in borrowing/lending) fell quarter-on-quarter, to 2.86%, slightly higher than markets were expecting. No NIM guidance was provided for 2024.
Retail customer deposits increased £3.5bn quarter-on-quarter, as a dip in current account levels across the client base was more than offset by a rise in longer-term savings balances. The pace of shift from current to term accounts slowed over the quarter.
Arrears remained broadly stable and in line with pre-pandemic levels. An impairment charge of £126mn was taken over the quarter in expectations for future defaults. The CET1 ratio, a key measure of financial resilience, was 13.4% (target range 13-14%).
Paul Thwaite was confirmed as permanent CEO and the group announced a final dividend of 11.5p, as well as an on-market buyback of up to £300mn over 2024.
The shares rose 2.9% in early trading.
Our view
NatWest's record 2023 was marked by performance peaking early on. But as we moved through the year headwinds started to become more pronounced. It's clear that we won't be going back to the levels of profit seen in early parts of 2023. That doesn't mean NatWest needs to be put on the sidelines and fourth quarter results were broadly better than expected.
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 better than expected as customers continued to show remarkable resilience in the face of higher inflation and interest rates. We think it's reasonable to expect low default rates to continue over 2024.
Deposits make up the other side of the equation and we continue to see retail customers in search of better rates from longer-term savings accounts. That's been an ongoing headwind over the past year. But crucially for NatWest, the pace of deposit switching was significantly slower in the fourth quarter than in the prior. Perhaps a sign that the peak in switching has come and gone. That'd be 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 reducing the cost to income ratio (2023 51.8%) - medium-term targets look for sub 50% but we don't expect that to come anytime soon.
Investors will be a little unhappy to see a lack of specific guidance on margins and an income forecast that was lower than expected. But we think management have been overly cautious with their £13-£13.5bn income guide.
There are other positive developments too.
Mortgage pricing is currently a pain point, as more profitable business written over the pandemic is replaced. But that headwind should ease over 2024. There's also the benefit from the structural hedge - think of this like 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.
The UK banking sector is unloved, but with strong balance sheets and some easing headwinds on the horizon we see potential. Given recent turbulence at the executive level, NatWest's valuation gap to its closest peer, Lloyds, has expanded. We now see it as having one of the better potential upsides in the sector. Though nothing is guaranteed, and a new leadership team adds risk.
Natwest key facts
All ratios are sourced from Refinitiv. 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.