NatWest profit upgrade propels shares to 9-year high

NatWest Group (LSE:NWG) has echoed the theme from Lloyds Banking Group (LSE:LLOY) 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.

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

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 to 30 June. 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 200,000 accounts over the period, while customer deposits rose by £6.1 billion. In addition, NatWest has announced that it is acquiring £2.5 billion of UK residential mortgages from Metro Bank, which will further bolster its financial firepower.

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• The tax trap affecting 500,000 workers and how to beat it
• Lloyds Bank half-year results: steady rather than spectacular

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.

• What the Olympics and investing have in common
• Why Centrica and Vodafone shares are going different ways
• Reckitt Benckiser: a FTSE 100 stock at big discount to peers

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 FTSE 100, 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 (LSE:BARC), with a market consensus which comes in at a comfortable 'buy'.