NatWest Group — formerly known as RBS — said its operating profit before tax rose 33% to £5.1 billion in 2022 as its total income rose 25% to £13.16 billion.

The group increased its bonus pool for staff by 23% to £367.5 million.

NatWest also announced a share buyback programme of up to £800 million and has recommended a final dividend of £1 billion, or 10p per ordinary share — up from 7.5p in 2021.

However, its share price fell about 7% as NatWest issued 2023 guidance that disappointed some investors.

Keefe Bruyette & Woods analyst Edward Firth told Bloomberg: “Guidance is dire.”

NatWest said its net interest margin in 2023 would be unchanged at 3.2%, which a Morgan Stanley analyst indicated would underwhelm the market.

UK taxpayers still own 45.97% of NatWest-RBS following its bailout during the financial crisis.

NatWest said its net lending increased by £7.3 billion to £366.3 billion during 2022 “primarily reflecting £14.4 billion of growth in retail banking mortgages, with gross new mortgage lending of £41.4 billion, and a £5.7 billion increase in commercial & institutional, partially offset by a £14.6 billion reduction in central items & other, which included a £6.4 billion decrease as we continued our exit from the Republic of Ireland.”

The group said customer deposits fell by £29.5 billion during 2022 to £450.3 billion “principally reflecting a £14.2 billion reduction in commercial & institutional due to an overall market liquidity contraction in the second half of the year and reductions in corporate and Institutions, particularly non-operational accounts in financial institutions and professional services with relatively low margin and funding value, and a £12.2 billion reduction associated with our withdrawal from the Republic of Ireland.”

REACTION:

Steve Clayton, Head of Equity Funds at Hargreaves Lansdown: “NatWest acknowledge that there is a gloomy case that can be made about the outlook as rising interest rates and high utility bills bite, but their customers are so far resilient. Bad debt losses were just 0.09% of the loan book and much of that was assumptions about what’s coming next, rather than loans that have already soured.

“Capital strength is rebuilt to the point where NatWest is to start an £800mn share buyback programme, and pay a final dividend of 10p per share. NatWest’s total capital distributions last year were equivalent to 53p per share. Core Tier 1 equity now stands at 14.2%, despite a hit to the funding of the pension scheme.

“All well and good, but NatWest are also suggesting that margins will expand no further from here. With the stock having stormed 20% higher so far this year, some will be expecting more than that from the group. That explains the sharp tumble the shares have taken this morning, down almost 9% in early trade.”

Richard Hunter, Head of Markets at interactive investor: “NatWest finished its year in fine style, buoyed by an embarrassment of riches which further strengthen its financial position.

“The current economic backdrop is one to which the bank is suited, being largely exposed to a UK economy where rising interest rates are in force and where bad debts remain low and containable, despite any constraints on the consumer. At the same time, the group’s mortgage growth remains strong, higher trading volumes have made a notable impact and any disappointments from the third quarter update have simply been swept away.

“Overall income rose by 25% to £13.16 billion, which was slightly ahead of expectations. Pre-tax profit was in line with forecasts, showing an increase of 34% to £5.1 billion. This was achieved despite a hit of £1 billion related to its withdrawal from the Republic of Ireland as well as an impairment charge of £337 million, which compares to a release of £1.3 billion last year. The provision leaves much scope to combat potential customer default and at the group’s own admission, is towards the end of the most pessimistic scenario, which could augur well in future if this level of bad loans does not materialise.

“At the same time, for the most part the key metrics remain in fine shape. Net Interest Margin rose to 2.85% from 2.3% the previous year (and was at 3.2% for the fourth quarter), Net Interest Income grew 31% and the Return on Tangible Equity spiked to 12.3% from a previous figure of 9.4%. The balance sheet is typically robust, with a stable capital cushion, or CET1 ratio, of 14.2%, while the Liquidity Coverage Ratio is also well in excess of the required level at 145%.

“The group has also been targeting costs and an overall reduction of 2.9% is line with its target. Coupled with the bounce in revenues, the cost/income ratio now stands at 55.5%, down from 69.9% last year, with a target for this year of under 52% and then 50% longer term. Indeed, in terms of outlook NatWest is aiming to build on its strong momentum, with aims for the current year of between 14% and 16% for ROTE, 3.2% NIM and overall income of £14.8 billion.

“In the meantime, the boost to profits has also enabled some financial largesse to be bestowed on NatWest’s shareholders. Of particular note is the announcement of a share buyback programme of £800 million, well in excess of an expected number nearer to £730 million, while the dividend has also been increased, leading to a projected ordinary yield of 4.4%, a figure which is turbocharged to 9.9% if the recent special dividend is included.

“The remaining government stake of around 46% is something of an overhang for the shares, although the commitment to continue to whittle it down further has already been declared. Indeed, in these circumstances such demands on the bank’s capital are ones which it can comfortably cater for. Elsewhere, the economic outlook in the UK, which could yet deteriorate towards a recessionary environment, would put more pressure on the banks’ customers, for both individuals and companies alike.

“Even so, for the moment NatWest is delivering across the board, while also remaining prudent in the use of its excess capital. The share price has reflected improving prospects, having risen by 17% over the last year, as compared to a gain of 6.3% for the wider FTSE100.

“A slightly perplexing reaction has hit the shares in early trade, perhaps in light of some profit taking after the share price spike of 24% over the last three months, while a weaker market generally is also clouding sentiment. However, over two years the shares have jumped by almost 60% and the market consensus of the shares as a buy is indicative of the appreciation investors have for the progress the once-beleaguered group is making.”