NatWest results are solid, if a little unexciting

Given the wider banking turmoil recently, this performance from the FTSE 100 bank is just what the doctor ordered for more risk-averse investors, writes Richard Hunter.

Set against the wider banking turmoil of recent months the solid and dependable, if a little unexciting, performance which NatWest Group (LSE:NWG) has delivered is just what the doctor ordered for more risk-averse investors.

• Invest with ii: Top UK Shares | Share Tips & Ideas | Open a Trading Account

The group has confirmed its guidance for the year as a whole, while propelling towards its targets with a strong first-quarter report in which most of the key metrics were comfortably better than expectations. Indeed, perhaps the current economic backdrop is one to which the bank is suited, being largely exposed to a UK economy where rising interest rates are in force and where bad debts remain low and containable. At the same time, the group’s lending and mortgage growth in particular remains strong, and higher trading volumes have made a notable impact.

At a group level, revenues of £3.9 billion compare to £3.01 the previous year and an expected number of £3.76 billion. Pre-tax profit rose to £1.82 billion from £1.2 billion and against estimates of £1.57 billion, with net profit of £1.28 billion comparing to £841 million in the corresponding period and ahead of the consensus of £1.07 billion.

The group has described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain. As such, the level of customer defaults remain low for both the retail and corporate businesses (indeed, the latter released some provisions) and the group’s modelling also highlights red flags as they emerge. Even so, given the potential deterioration for the macro-environment, the group has made a modest provision of £70 million for the quarter, as compared to a release of £38 million this time last year.

• Lloyds Bank and NatWest among FTSE 100 mega-dividend payouts in May
• Insider: a big boardroom bet and massive sale at FTSE 100 hot stock 

The key metrics are for the most part further proof of a robust financial position and careful management. The cost/income ratio has improved from 57.1% to 49.8%, with the capital cushion remaining more than adequate at 14.4%. The Liquidity Coverage Ratio is also well in excess of regulatory requirements at 139%, and the Return on Tangible Equity figure is a particular highlight, coming in at 19.8% for the quarter against a previous 11.3% and estimates of 16.2%.

The rising rate environment has inevitably been positive for Net Interest Income, which has risen from £2 billion to £2.9 billion in the quarter. At the same time, a strong trading performance from a Commercial and Institutional unit which accounts for half of total group income boosted profits, with strong lending growth in the Retail business adding to the mix.

The decline of 2.6% in deposit balances is an area of slight disappointment, relating to market competition and contraction, and showing a marginal shift in customer behaviour. In addition, the remaining government stake of around 43% is something of an overhang for the shares, although the commitment to continue to whittle it down further has already been declared. Indeed, in these circumstances such demands on the bank’s capital are ones which it can comfortably cater for. In the meantime, the bank’s buyback programme continues apace, as does its commitment to a progressive dividend policy where the current yield of 5% (turbocharged to 11% if the special dividend announced last year is taken into account) remains a clear investment attraction.

As with its peers, the shares have been under pressure of late given the wider banking travails and have declined by 11% over the last three months. The rather negative reaction to the numbers in early trade could contain an element of disappointment on customer balances and unchanged outlook guidance. However, the share price has still managed to post a gain of 14% over the last year, which compares to a rise of 4.3% for the wider FTSE 100. The strength and stability of the group is one which has been attracting investors given a generally difficult backdrop, and the market consensus of the shares as a buy reflects investor belief in the bank’s ability to weather the current economic turbulence.