NatWest delivers record profits despite turmoil

Dame Alison Rose received a one-line mention in the half-year results as NatWest (NWG) tried to distance itself from the recent farrago (sic) at its private bank subsidiary Coutts – whose head has also resigned. While it awaits the confirmation of Paul Thwaite as chief executive, the affair overshadowed what was a solid set of half-year results with profits topping £3bn and the bank announcing surprise plans to buy back another £500mn worth of shares – when this is completed NatWest will have distributed £2.5bn of spare capital for this half alone. The market was pleased enough with the results that, in contrast to its high street stablemates, the shares were marked higher on the day as investors digested the news. However, there were hints that this outperformance has a clearly defined shelf life.

Much of NatWest’s profit growth is dependent on the Bank of England’s interest rate raising campaign and management marked down its forecast for net interest margin this year from 3.20 per cent to 3.15 per cent to reflect uncertainty over the direction of rates. The cut is small in material terms but shows that the expectation for interest rates this year seems to have peaked. Indeed, NatWest’s working assumption is that average rates will be around 5.5 per cent until the year-end. Another factor is that mortgage pricing seems to have stabilised over the course of the half, which is another restraint on NIM.

Another area investors noted was the relative lack of deposit churn in the second quarter after outflows were seen in the first quarter as consumers chased better deals. That situation seems to have stabilised, although the bank did report that total deposits were £11bn lower at £421bn compared with last year. Credit losses of £153mn were far better than analysts had forecast and seemed to reflect better-than-expected economic conditions during the half.

Other key ratios came in ahead of expectations. For example, the bank’s return on tangible equity was 16.4 per cent, well above the 14-16 per cent range that management has targeted. Core tier 1 ratios, a measure of its available liquidity, was comfortably in the 13-14 per cent target range.

Overall, investors can be satisfied with the company’s operational performance, if not with the antics of its management. However, with all that has happened to NatWest/ex-RBS since 2008, this is probably the least problematic episode. With consensus valuing the shares at a forward price/earnings ratio of 5.5, a small discount to peers, we still rate the shares for income seekers. Buy.

Last IC View: Buy, 279p, 17 Feb 2023