After a turbulent few weeks that has seen two chief executives depart, Natwest (NWG) reported its interim results on Friday.
In the first half of 2023, total income rose to £7.73 billion from £6.22 billion a year before, as net interest income came in at £5.73 billion from £4.33 billion.
Operating pretax profit climbed to £3.59 billion from £2.62 billion.
The bank also declared an interim dividend of 5.5 pence and intends to begin a buyback of up to £500 million in the second half, in addition to the £1.3 billion buyback completed in the second quarter. Its core equity tier income 1 (CET1) ratio fell by 70 basis points to 13.5% at the end of June, mostly reflecting capital distributions. Customer deposit balances were stable in the second quarter after the outflows seen in the first quarter, it noted. Customer deposits excluding central items fell by £11.8 billion to £421.1 billion over the first half. It reiterated guidance provided in its annual report, but said 2023 bank net interest margin is now expected to be less than 3.20%, with a current view of around 3.15%.
After the announcement, shares rose nearly 3% but this follows a few days of losses after the Farage scandal broke. At £2.47 per share, they are below the £3 fair value assigned by Morningstar analysts.
Senior bosses at the bank are set to face scrutiny from shareholders following the dramatic fallout in the row sparked by Nigel Farage over the closure of his Coutts bank account. The scandal culminated in the resignation of NatWest CEO Alison Rose and the boss of Coutts, Peter Flavel, which is owned by the banking group. The earnings report comes at a time of volatility for the bank with the two bosses resigning and the group's board facing pressure to explain the events leading up to the fallout.
Chairman Howard Davies said on Friday he would remain in post and that a legal team had been appointed to look into the Farage case.
What’s the Reaction to the Results?
Equity analysts at Jefferies noted that results came in below consensus forecasts but that the full-year revenue forecast is unchanged at £14.8 billion. They described the buyback news as a surprise also pointed to better-than-expected credit losses, which they put down to “better macroeconomic outlook and upside scenario weightings”; in layman’s terms, that means the economy isn’t doing as badly as some experts feared. (As a dominant mortgage lender, NatWest is exposed to the UK mortgage crisis and via its credit card and personal loan businesses.)
Matt Britzman, equity analyst at Hargreaves Lansdown, said: “Today’s results probably don’t do the group any favours … despite a slight beat on the bottom line. We know markets are laser-focused on net interest margin and at 3.13% for the second quarter that was below expectations, leading to a miss on net interest income. But perhaps more importantly, full-year guidance has been dragged lower reflecting the ongoing deposit shift to accounts that offer better rates as consumers do all they can to make cash savings go further. NatWest should be a little more robust than peers in this regard, owing to the fact more of its deposits are held by small and medium-sized businesses which tend to keep more cash current accounts that are more profitable for banks.
“The UK borrower continues to look robust and this was one area of strength in today’s results. NatWest increased its expectations of future loan defaults by £223m over the half, though a lower-than-expected number for the second quarter reflects default levels that remain low across the portfolio. As we saw with Barclays, a new buyback will go some way to easing investor sentiment, but with NatWest much more reliant on interest income, the downgrade to margin guidance will be disappointing for many.”
AJ Bell investment director Russ Mould said that this wasn’t a set of results to completely silence the critics.
“While indiscretion may have led to her departure the latest results from NatWest suggest former CEO Alison Rose was making a decent fist of her day job.
“After years of struggle following its forced nationalisation during the 2007/8 financial crisis, Rose had probably got the bank as close to normality as any of her predecessors and there will be real frustration that NatWest is back in crisis mode, undoing much of that good work.
“This is not an unblemished update. The trimming of guidance on the company’s net interest margin hints at the problems for banks, under big political and regulatory pressure, of charging more to borrowers without offering more to savers too, particularly with mounting competition in the savings market.
“And, while earnings beat expectations, this reflected several one-off items and did not reveal too much about the underlying performance of the bank.
“The scandal over confidentiality and the way it has played out is a reminder to other investors that the Government remains a major shareholder and, as such, has real influence on the way the bank is run. This is not a reminder the market is likely to receive positively.
“While bad debts remain under control for now, the pressures on UK households are acute and this remains an issue which could flare-up for NatWest and the other banks.”
