Shares of NatWest Group plc rose on Friday after it raised its forecast for full-year income and announced the acquisition of £2.5 billion of prime UK residential mortgages from Metro Bank.
The company, formerly called Royal Bank of Scotland, said it now expects full-year income to be around £14 billion, up from an earlier forecast of £13 billion to £13.5 billion.
NatWest published first-half results saying it generated net interest income and fee revenue in the second quarter that topped analysts’ expectations.
Shares in the banking group rose as much as 7%, taking the stock’s gains this year to almost 60%.
NatWest said the acquisition of £2.5 billion of prime residential mortgages from Metro Bank would add about 10,000 customers.
The Metro Bank deal comes after NatWest last month announced it would buy the bulk of Sainsbury’s Bank, giving it access to an expected 1 million new accounts and £2.5 billion worth of unsecured loans.
NatWest reported H1 2024 attributable profit of £2.099 billion and a return on tangible equity (RoTE) of 16.4%.
The bank said Q2 2024 total income of £3.590 billion was £176 million, or 5.2%, higher than Q1 2024, primarily reflecting increased deposit income “whilst H1 2024 was £379 million lower than H1 2023 due to lower average deposit balances and mix changes and lending margin pressure.”
Net interest margin (NIM) of 2.10% was 5 basis points higher than Q1 2024 primarily due to improved deposit margins.
In its 2024 outlook NatWest said it now expects to achieve a return on tangible equity above 14% and income excluding notable items to be around £14 billion.
NatWest Group CEO Paul Thwaite said: “As the UK’s leading business bank, and one of the largest retail banks, NatWest Group’s strong performance is grounded in the vital role we play in the UK economy and in the lives of our 19 million customers.
“In the first half of the year, we have delivered an operating profit of £3 billion, a return on tangible equity of 16.4% and a 6 pence interim dividend, up 9% on last year’s dividend. We are also pleased with the continued reduction of the Government’s stake, which has almost halved this year.
“We have made good progress against our strategic priorities, taking decisive action to grow and simplify our business and to manage our capital and costs more efficiently.
“There has been growth across all three of our businesses, we have attracted over 200,000 new customers and our acquisition from Sainsbury’s Bank is expected to add around one million customer accounts on completion.
“We have also agreed to acquire £2.5 billion of UK prime residential mortgages from Metro Bank plc, adding further scale to our Retail Banking business.
“The positive momentum and progress in the first half reflect the ambition across the bank to deliver its full potential.
“Our customers are beginning to feel more confident, with activity increasing and asset quality remaining strong, and we are well positioned to help unlock growth across the UK through our unrivalled regional network.
“Fundamentally, if we succeed with our customers, we will succeed for our shareholders and the wider economy.”
REACTION:
Matt Britzman, senior equity analyst, Hargreaves Lansdown: “NatWest has just delivered a knockout set of results. As with Lloyds yesterday, it’s the quarter-on-quarter numbers that investors are paying attention to. Second-quarter results have pretty much beaten expectations on every key metric, from income to margins. It’s also good to see full-year guidance on net interest income finally get the upgrade investors had been hoping to see, and now supports the numbers analysts had been pencilling in. That’s positive news and helps underpin the stock price which has been on a heater this year.
“Unlike Lloyds yesterday, lower impairments weren’t the only reason for the profit beat, though that was a key factor with NatWesttoo. The UK economic outlook is improving, and borrowers are holding firm in the face of higher interest rates. NatWest is also seeing some improvement from margins on the deposit side and has managed to grow its net interest margin quarter-on-quarter.
“NatWest didn’t manage to grow the loan book, but new mortgage activity in the second quarter was significantly higher than the first. That’s a good sign for the remainder of the year, as NatWest doesn’t have quite as big a drag from legacy mortgages as peers. The acquisition of £2.5bn worth of prime mortgages from Metro Bank suggests inorganic loan book growth is on the table too.
“NatWest is poised to benefit from many of the sector’s positive trends, such as improving lending conditions, an easing of savers’ search for fixed-term accounts, and a structural hedge that offers a significant income tailwind.”
Richard Hunter, Head of Markets at Interactive Investor: “NatWest has echoed the theme from Lloyds Banking yesterday with a creditable half-yearly performance boosted by a strong second quarter.
“The similarities between the two businesses are evident across the board, but most promisingly the strength of the second quarter could mark an inflection point with inflation falling and interest rates likely to follow suit, to the benefit of the end customer. For NatWest, operating pre-tax profit for Q2 of £1.7 billion comfortably beat estimates of £1.26 billion, leading to a figure of £3 billion for the half-year. Net Interest Income for the latest quarter was in line at £2.76 billion, with the Net Interest Margin figure improving from 2.05% to 2.1%, again suggesting some stabilisation.
“There are a number of other signs that NatWest is now moving to another level, with Return on Tangible Equity (ROTE) rising to 16.4% from 14.2% the previous quarter, leading to an upgrade on the full-year outlook to a figure in excess of 14%. The total income figure was also subject to an upgrade to around £14 billion from a previously guided range of between £13 billion and £13.5 billion.
“In addition, the bank has been busy in growing its lines of potential revenues. Quite apart from the previously announced acquisition of the majority of Sainsbury’s Bank, which is expected to add one million customers, NatWest added 200000 accounts over the period, while customer deposits rose by £6.1 billion. In addition, the NatWest has announced that it is acquiring £2.5 billion of UK residential mortgages from Metro Bank, which will further bolster its financial firepower.
“Elsewhere, the key metrics remain in generally strong shape, with a capital cushion or CET1 ratio of 13.6% edging higher from the previous quarter and with an impressive cost/income ratio of 55.5%. The impairment charge was also reduced to a net £48 million for the period, due to a revised and lower level of pressure on consumers, where customer default numbers remain low, removing some of the uncertainty leading up to these numbers. Indeed, NatWest had previously described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain.
“The recent UK election put paid to the likelihood of a potential retail offer for the government’s remaining stake in NatWest, although the possibility seems to remain on the table. In any event, further reductions have been made, which now stands fractionally under 20% from the initial peak some years ago of around 84%, also chiming with the shared ambition of returning NatWest to private ownership.
“The strength and stability of the balance sheet has also enabled an increase to the dividend, which gives a projected yield of 5.2%, with every likelihood of more hikes to come. The previously announced £1.2 billion share buyback programme was completed in May and, subject to a continuation of the most recent trends, a fresh announcement could quite conceivably follow over the coming months.
“Overall, this is a highly reassuring update which has received a very warm welcome in opening exchanges. The share price bounce adds to an increase of 35% over the last year, as compared to a gain of 6.6% for the wider FTSE100, and is further evidence of the momentum which propelled the price by 55% in the last six months alone. NatWest has delivered an outcome which could mean that it regains its spot as the preferred play on the sector, recently being edged out by Barclays, with a market consensus which comes in at a comfortable buy.”