NatWest profit soars but deposit outflow hits shares

NatWest-RBS CEO Alison Rose

Shares of NatWest Group, formerly known as RBS, fell as much as 6% on Friday after it announced its first quarter pretax operating profit soared 49% to £1.8 billion, beating estimates — but reported a £19.8 billion fall in deposits during the period.

Higher central bank interest rates that boost lending returns have encouraged customers to shop around.

NatWest said total income increased by 28.9% to £3.876 billion compared with Q1 of 2022.

The group said total income, excluding notable items, was £1.036 billion, or 37.2%, higher than Q1 2022 “driven by volume growth, favourable yield curve movements and a strong performance in Commercial & Institutional trading income.”

The bank’s shares fell in morning trading as investors digested a third successive quarter of reduced deposits and analysts noted the lack of an expected upgrade to the bank’s performance forecast for the year.

Bank NIM (net interest margin) of 3.27% was 7 basis points higher than Q4 2022 “principally reflecting the beneficial impact of recent base rate rises partially offset by reduced mortgage margins.”

NatWest said customer deposits decreased by £19.8 billion in the quarter “including an £8.7 billion reduction in Central items & other related to our exit from the Republic of Ireland and Treasury repo activity.”

It said customer deposits excluding central items reduced by £11.1 billion “reflecting customer tax payments which were higher than previous years, competition for deposits and an overall market liquidity contraction.”

NatWest Group CEO Alison Rose said: “NatWest Group’s strong performance in Q1 2023 is underpinned by our robust balance sheet, our high levels of capital and liquidity and our well-diversified loan book.

“Through a period of significant macro disruption and uncertainty, we continue to stand alongside the people, families and businesses we serve, providing targeted support and growing our lending responsibly.

“Our disciplined and consistent approach to risk management means that arrears and impairments remain low.

“By monitoring customer behaviour and looking closely for signs of financial distress, we are able to put in place proactive measures to help those who are struggling right now and those who are worried about the future.

“As we continue to make progress against our strategic priorities, NatWest Group is well positioned to navigate this challenging operating environment and to deliver sustainable growth and returns by responding to new and emerging trends that are shaping the lives of our customers.”


Richard Hunter, Head of Markets at Interactive Investor: “Set against the wider banking turmoil of recent months the solid and dependable, if a little unexciting, performance which NatWest has delivered is just what the doctor ordered for more risk-averse investors.

“The group has confirmed its guidance for the year as a whole, while propelling towards its targets with a strong first quarter report in which the majority of the key metrics were comfortably better than expectations.

“Indeed, perhaps 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. At the same time, the group’s lending and mortgage growth in particular remains strong, and higher trading volumes have made a notable impact.

“At a group level, revenues of £3.9 billion compare to £3.01 the previous year and an expected number of £3.76 billion. Pre-tax profit rose to £1.82 billion from £1.2 billion and against estimates of £1.57 billion, with net profit of £1.28 billion comparing to £841 million in the corresponding period and ahead of the consensus of £1.07 billion.

“The group has described its own ‘intelligent approach to risk’ as including a proactive attitude for those customers who may be approaching some level of financial strain. As such, the level of customer defaults remain low for both the retail and corporate businesses (indeed, the latter released some provisions) and the group’s modelling also highlights red flags as they emerge.

“Even so, given the potential deterioration for the macro-environment, the group has made a modest provision of £70 million for the quarter, as compared to a release of £38 million this time last year.

“The key metrics are for the most part further proof of a robust financial position and careful management. The cost/income ratio has improved from 57.1% to 49.8%, with the capital cushion remaining more than adequate at 14.4%. The Liquidity Coverage Ratio is also well in excess of regulatory requirements at 139%, and the Return on Tangible Equity figure is a particular highlight, coming in at 19.8% for the quarter against a previous 11.3% and estimates of 16.2%.

“The rising rate environment has inevitably been positive for Net Interest Income, which has risen from £2 billion to £2.9 billion in the quarter. At the same time, a strong trading performance from a Commercial and Institutional unit which accounts for half of total group income boosted profits, with strong lending growth in the Retail business adding to the mix.

“The decline of 2.6% in deposit balances is an area of slight disappointment, relating to market competition and contraction, and showing a marginal shift in customer behaviour. In addition, the remaining government stake of around 43% 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. In the meantime, the bank’s buyback programme continues apace, as does its commitment to a progressive dividend policy where the current yield of 5% (turbocharged to 11% if the special dividend announced last year is taken into account) remains a clear investment attraction.

“As with its peers, the shares have been under pressure of late given the wider banking travails and have declined by 11% over the last three months. The rather negative reaction to the numbers in early trade could contain an element of disappointment on customer balances and unchanged outlook guidance.

“However, the share price has still managed to post a gain of 14% over the last year, which compares to a rise of 4.3% for the wider FTSE100. The strength and stability of the group is one which has been attracting investors given a generally difficult backdrop, and the market consensus of the shares as a buy is reflects investor belief in the bank’s ability to weather the current economic turbulence.”

Matt Britzman, equity analyst at Hargreaves Lansdown: “NatWest rounds off a good week for the major UK banks, beating earnings expectations as provisions set aside for debt defaults were better than first thought.

“This is an ongoing trend, somewhat bucking the idea that the global banking system is in troubled water. In fact, the major banks across the UK look to be in rude health, and NatWest is just the latest example. Capital levels remain healthy, and the portfolio’s debt defaults are stable and low.

“There was an outflow of customer deposits over the quarter, but it’s not cause for concern. Consumers shopping around for the best rates isn’t much of a surprise, given they’ve spent years getting little to nothing from their cash deposits.

“For now, higher interest rates are doing their job to prop up earnings and offset the impact of a more challenging and competitive mortgage market.”