NatWest shares hit amid debt provision, cost concerns

NatWest-RBS CEO Alison Rose

Shares of NatWest Group fell as much as 9% on Friday after the bank, formerly known as RBS, warned of rising costs and as its third-quarter results were hit by the UK’s negative economic outlook and an increase in bad debt provisions.

NatWest said it set aside an additional £247 million in the quarter to reflect the outlook and said: “We no longer expect costs to be broadly stable given increased inflationary pressures.”

NatWest was also hit by a €652 million loss in the quarter in its Ulster Bank business in Ireland, which it is in the process of exiting. This included a €419 million loss “associated with the reclassification of UBIDAC mortgages to fair value.”

Operating profit before tax of £1.086 billion for the July-September quarter was slightly below analyst forecasts.

The bank said its net interest margin (NIM) of 2.99% was 27 basis points higher than Q2 of 2022 “driven by the impact of base rate rises.”

Total quarterly income for the NatWest “Go-forward group” increased 24.2% to £3.266 billion compared with Q3 of 2021.

“At today’s Bank of England base rate of 2.25% we expect 2022 income excluding notable items to be around £12.8 billion …” said NatWest.

“We expect NIM to be greater than 2.80% for full year 2022 …”

Net loans to customers increased by £4.1 billion or 2.2% in in the third quarter “mainly reflecting continued mortgage growth of £3.9 billion, with gross new mortgage lending of £11.0 billion representing flow share of around 13%.”

Group customer deposits decreased by £14.5 billion to £461.7 billion compared with Q2 of 2022 “primarily driven by a reduction in Treasury repo activity of £7.6 billion and an £8.0 billion reduction in Commercial & Institutional reflecting reversal of short term inflows in Q2 2022 and general seasonal fluctuations in liquidity.”

NatWest Group CEO Alison Rose said: “At a time of increased economic uncertainty, we are acutely aware of the challenges that people, families and businesses are facing up and down the country.

“Although we are not yet seeing signs of heightened financial distress, we are very conscious of the growing concerns of our customers and we are closely monitoring any changes to their finances or behaviours.

“The bank’s strong capital and liquidity mean we are able to help those who are likely to need it the most, through support for our community partners, proactive outreach to our customers or targeted lending packages for the most impacted sectors.”


Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown: “UK banking high street staple, NatWest, continues to benefit from higher interest rates, with net interest income jumping close to £800m compared to last year.

“This helpful tide will also carry the group through the next financial year. At the same time, costs are now expected to rise as it too can’t escape from the powers of inflation.

“While interest rates are on the rise, they are still low by historic standards, which stops profits from totalling taking off for the banks.

“NatWest is doing what it can to stoke growth in non-interest-rate related areas too, with a 12 month freeze in SME fees in its Commercial & Institutional arm.

“Ultimately, while the bank is in a reasonable position for now, we are expecting an arduous downturn in the economy by the middle of next year, which will rock the boat, regardless of the interest rate and market landscape.”

Richard Hunter, Head of Markets at Interactive Investor: “NatWest has rounded off the banks’ reporting season in mixed fashion, with some enforced financial writedowns blotting the overall copybook.

“The planned withdrawal from the Republic of Ireland through its Ulster Bank subsidiary has led to a charge on the mortgage book of some €420 million.

“In addition, NatWest has succumbed to the necessity of making bad debt provisions in line with most of its peers.

“Whereas the group bucked the trend in the second quarter by releasing £18 million of provisions, for this quarter a charge of £242 million has been made.

“This leaves the cumulative figure for this year as a provision of £193 million, which compares to a release of £904 million in the corresponding period last year, and the £1 billion swing has affected overall numbers.

“Indeed, net profit for the quarter of £187 million compares to a profit of £674 million last year, with pre-tax profit ahead of the corresponding period but shy of market expectations, at £1.1 billion. Revenue was in line with forecasts, coming in at £3.2 billion, up from £2.7 billion last year.

“There are similar themes throughout the release to the rest of the sector. The bank has felt the need to take a conservative approach to the possibility of bad debts, even though at present there is little sign of customer behaviour switching towards default. At the same time, the underlying business excluding Ulster – the ‘Go-forward Group’ registered an increase in income of 37%, driven by the tailwinds of increasing interest rates as well as a significant increase of £9.9 billion in lending, itself largely made possible by further strength in mortgage lending, despite recent headlines suggesting otherwise.

“Elsewhere, the key metrics are in good shape. Net Interest Margin increased to 2.99% from 2.72% in the second quarter, and Net Interest Income jumped significantly to £7 billion from £2.3 billion. The capital cushion remains unchanged but comfortably robust at 14.3%, while the Liquidity Coverage Ratio is well ahead of the required level at 156%, even though the figure is marginally lower than the 159% of the previous quarter.

“The Return on Tangible Equity figure for the Go-forward Group was also strong at 12.1%, and in terms of outlook NatWest is targeting to hit a range of between 14% and 16%. In the meantime, the overall strength of the balance sheet and general financial health leaves the group in the enviable position of deciding how to deploy the capital at its disposal.

“The current dividend yield is attractive to income-seeking investors at 4.4%, a figure which is turbocharged to 11.2% if including the recent special dividend. At the same time, the bank intends to continue this elevated level of returns while not discounting further share buybacks or even acquisition opportunities should they arise. Coupled with the intention further to reduce the government stake of 48%, there is much demand on the bank’s capital, which it is comfortably able to provide at these levels.

“The remaining government stake is something of an overhang for the shares, although the commitment to continue to whittle it down further is already declared. The economic outlook in the UK, which is likely to deteriorate from an already likely recessionary environment, will put more pressure on the banks’ customers, for both individuals and companies alike.

“However, in terms of the share price, the bank’s considerable strength has enabled it to weather the storm more favourably than most of its peers. Prior to today, the shares had fallen just 1% over the last year, as compared to a decline of around 2.5% for the wider FTSE100, and the last six months had seen a tentative recovery.

“Wider market weakness at the open and an unforgiving attitude to banks missing expectations has weighed heavily on the shares in early exchanges, but for the longer term the shares remain the preferred play in the sector, with the market consensus still coming in at a strong buy.”

Ian Gordon of Investec: “I understand why the shares are off a bit because of the perception of loss of control on costs and some greater uncertainty..

“But in terms of confidence around delivering a level of returns not seen in more than a decade next year, that absolutely remains.”

Mark Crouch, analyst at social investing network eToro: “NatWest has posted a decent set of numbers this morning. Of particular note, it is careful to point out that there isn’t much indication of heightened financial distress in the UK affecting its lending. This stands in contrast to Lloyds, which saw profits fall thanks to rising debt charges.

“Also of note for NatWest is its net interest margin. This is the amount of money it earns arbitrating between the Bank of England base rate and what it is giving to savers. This stands at 2.99% – 27 basis points higher than Q2, a nice little earner for the firm.

“But pressure will grow to lift this the longer that interest rates stay higher. Savers have been given a hard time in the past decade, and it doesn’t look like this is going to change any time soon, even with a higher base rate.”