Shares of NatWest Group Plc — the bank formerly known as Royal Bank of Scotland — rose another 4% as it raised its outlook for the year after its third quarter earnings beat estimates.
Shares in the bank rose to the highest in nine years around £3.80 after it reported an increase in Q3 operating profit before tax to about £1.67 billion, better than analysts’ expectations.
NatWest shares have risen about 70% in 2024 to give the firm a current stock market value of about £31 billion.
The banking group’s pre-tax operating profit in the three months to September was £1.7 billion, up from £1.3 billion in the same period last year and above analyst expectations of £1.5 billion. Revenues rose to £3.7 billion, also above forecasts.
NatWest also out aside £245 million in provisions for bad loans — higher than expectations of £173 million — as it recorded a rise in troubled commercial and institutional loans.
Net interest margin was 2.18%, better than the previous quarter.
Net loans to customers increased by £8.4 billion in the quarter, of which £2.3 billion was in relation to the Metro Bank mortgage portfolio acquisition, with strong growth across the three businesses, including a £1.4 billion increase in mortgage balances.
Customer deposits increased by £2.2 billion with growth across all three businesses driven by savings.
NatWest Group CEO Paul Thwaite said: “The strength of NatWest Group’s performance is underpinned by the support we provide to our 19 million customers in every nation and region of the UK. By continuing to deliver against our strategy, we are growing and simplifying our bank whilst managing our capital more efficiently.
“As the UK’s biggest bank for business, and one that serves millions of households, NatWest Group plays a key role in driving economic growth across the UK. Throughout the third quarter of 2024, we have grown our lending, helping customers to buy or remortgage their homes or to start and grow their businesses.
“With customer activity increasing, defaults remaining low and optimism amongst businesses and consumers, we are well placed to succeed with our customers and for our shareholders in the months and years ahead.”
REACTION:
Richard Hunter, Head of Markets at Interactive Investor: “The stars have been aligning for NatWest and this latest quarter has added to the growing momentum, prompting another upgrade to its guidance for the full year.
“The bank has not only improved its performance on the vast majority of key metrics, but in doing so has also sailed past most analyst expectations. Total income in the latest quarter of £3.77 billion was an improvement of 5% on the previous quarter and 7% on the previous year, against estimates of £3.58 billion and prompting a guidance upgrade for the year to around £14.4 billion.
“Net Interest Income (NII) of £2.9 billion played a large part here, again above estimates and bringing the total in the year so far to £8.3 billion. The so-called structural hedge, which lessens the group’s susceptibility to changes in interest rates and which many consider will be of particular benefit to NatWest, is also beginning to reap some further income rewards.
“Meanwhile, operating profit of £1.67 billion exceeded expectations of £1.46 billion, while profit overall for the third quarter of £1.2 billion was some 30% higher than the corresponding period.
“At the same time, the group received a boost not only from higher loans, but also higher deposits. The latter had been the source of some concern for the high street banks as customers sought higher savings rates elsewhere and even now there is some evidence of locking in higher rates (and therefore lower margin to the bank) in anticipation of interest rate reductions over the coming months.
“Even so, deposits rose by £2.2 billion in the quarter, while net loans to customers increased by £8.4 billion, driven largely by mortgage lending. The acquisition of the Metro Bank mortgage book was responsible for some £2.3 billion of this additional lending, with another £1.4 billion coming from elsewhere.
“Other key metrics also provide a reassuring tone, and in particular a Return on Tangible Equity of 18.3% in the quarter boosted the number to 17% in the year to date. As a result, NatWest has upped the full year guidance number to be in excess of 15%, which seems both conservative and achievable in the current environment.
“Elsewhere, a capital cushion of 13.9% is comfortably in range, while Net Interest Margin (NIM) of 2.18% is an improvement on the 2.1% of the previous quarter and of 2.05% in the first. A potentially sector-beating cost/income ratio of 47.6% in the latest quarter is also worthy of note, leading to a cumulative figure for the year of 52.8%.
“There are some minor potential blots on the landscape, but these are containable within the context of the group’s overall strength. Speculation around a banking windfall tax in next week’s Budget remains rife, while an uptick in impairments within the Commercial & Institutional division needs to be kept an eye on. Some early signs of strain at the corporate level have resulted in the bank making a precautionary addition to its impairment charge of £245 million.
“This brings the cumulative figure for the year to £293 million, although this level is significantly lower than the £452 million the previous year. In addition, 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, and levels of default overall remain low.
“The recent UK election put paid to the likelihood of a potential retail offer for the government’s remaining stake in NatWest, which will cost the group over £20 million in costs associated with the potential float. More positively, the government continues to reduce its stake in the bank, where its holding now stands at fractionally under 17% from the initial peak some years ago of around 84%, chiming with the shared ambition of returning NatWest to private ownership.
“It also progressively reduces the technical overhang of the stock as the holding reduces, which had been a headwind for many years. There may also be the option to continue to fulfil further government sales itself, which could potentially reduce the amount of share buybacks the group undertakes in the market.
“This extremely reassuring update comes against some heightened expectations, since NatWest has become the focus of strong investment attention in the recent past. The share price has risen by 74% over the last year, albeit from a relatively low base, as compared to a gain of 11.5% for the wider FTSE100. Even so, the welcome reaction to the update in the context of a weaker wider market at the open is testament not only to improving fortunes but also to continuing support from investors. Given the share price hike, the market consensus has moderated slightly, although the general view of the shares as a buy remains firmly intact on what seems to be growing optimism for the bank’s prospects.”
Matt Britzman, senior equity analyst, Hargreaves Lansdown: “NatWest marks the third major UK bank to report better than expected results this week, but this time it’s not driven by impairments. Better income and costs drove the beat today, offset by higher impairments than expected, which does buck the trend we saw from Lloyds and Barclays. That said, default levels remain low at NatWest and that bodes well for performance over the medium term.
“NatWest is also the third bank this week to mention easing deposit migration, and that’s the key reason it posted a decent beat on net interest margin. We’ll need to wait for more information on whether that beat was due to one-offs or sustainable changes, but either way, the full-year consensus for 2.16% looks too low now.
“After Barclays raised net interest income guidance yesterday, NatWest was expected to follow suit, given that it also had too many rate cuts in projections – it hasn’t disappointed. Income guidance has now been bumped up to a level higher than both previous guidance and what analyst consensus had built in. That should be enough to force analysts to revise numbers higher and give investors something to smile about.
“Looking ahead, the start of an interest rate-cutting cycle has relieved pressure on deposits and mortgages. All the while, the anticipated economic pain of higher rates never really came to pass – or at least hasn’t yet. That leaves NatWest in a nice spot to benefit from improving trends and lean on the structural hedge which will act as a strong driver of medium-term earnings.”