NatWest Q3 results: investor disappointment in full view

The disappointing themes which have plagued bank results this week have unsurprisingly been echoed at NatWest Group (LSE:NWG), although perhaps to a lesser extent.

Net Interest Margin (NIM) declines across the sector have taken a toll on share price performance, while also suggesting that the benefits of higher interest rates have peaked as customers seek higher returns on their cash after years of virtually nil return. The changing deposit mix has been a feature of the reporting season this far, as has the pressure on mortgage margins which has impacted overall NIM. For NatWest, NIM was 2.94% for the quarter, down from 3.13% in the previous, although holding up at 3.11% for the year to date. This should cause more than a ripple of disappointment given estimates of 3.07%, even though NatWest’s share price decline this week following the read across from other banks needs to be factored in.

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In terms of impairment, the news is slightly more positive. The new provision of £229 million this quarter takes the number to £452 million so far this year, significantly lower than that of its peers. For some, it will be a reflection of the generally lower-risk loan book which the bank runs, while NatWest has itself stated that levels of default are stable. The group 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, such that the new provision is a prudent move in the circumstances.

Despite the growth disappointments of the season so far, the strength of balance sheets across the sector remains healthily robust, and NatWest is no exception. The capital cushion, or CET1 ratio, is strong, stable and unchanged from the previous quarter at 13.5%, while the Liquidity Coverage Ratio has risen from 141% to 145%. A cost/income ratio of 49.5% (excluding litigation and conduct charges) is a welcome development, with the number running at 55.6% for the year to date.

Elsewhere, one of the few bright spots has been other banks’ improvement in the Return on Tangible Equity (ROTE) number. While marginally shy of expectations, NatWest achieved a ROTE of 14.7% in the quarter (including an impressive contribution of 17.5% from retail banking), with the number running at 17.1% so far this year. The bank is guiding for a ROTE of between 14% and 16% for the foreseeable future, which should provide some comfort for investors.

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Total income for the quarter rose by 3.4% to £3.49 billion, against expectations of £3.59 billion. Operating pre-tax profit was also slightly shy, with a number of £1.33 billion comparing to estimates of £1.36 billion, although materially stronger than the £1.1 billion reported in the corresponding period last year. The bank has managed to maintain its lending, particularly within its large mortgage book, while higher income from its corporate markets division has also provided a tailwind.

Its outlook largely mirrors current performance levels, with targets for the year of NIM in excess of 3% and a cost/income ratio of under 52%. In the medium term, this should fall to below 50% while, in a statement which should catch investors’ attention, the group has guided for the return of significant capital in the medium term. This prepares the stage for an announcement at the time of the full-year numbers in the new year, while in the meantime a dividend yield of 7.5% is sector-beating.

Overall, questions remain which have plagued the group and its share price performance. The remaining 39% government stake is still a technical overhang on the stock, although the determination to continue to whittle this down has already been declared and should progress. Alongside this issue, the bank is mindful of the potential deterioration of its customers’ fortunes and is taking prudent steps as necessary. Even so, the market is taking no prisoners in this reporting season and NatWest shares have again been pounded in opening exchanges. This adds to a decline of 16% over the last year, as compared to a gain of 4% for the wider FTSE 100, with investor disappointment in full view. It may be of little solace to shareholders just now, but the further decline will strengthen the investment case on valuation grounds and, despite the obvious despair, the bank remains stable and profitable. Indeed, the market consensus of the shares as a buy could well consolidate once the dust has settled on a torrid third quarter for the sector.