Stars align as NatWest smashes Q3 forecasts

The stars have been aligning for NatWest Group (LSE:NWG) and this latest quarter has added to the growing momentum, prompting another upgrade to its guidance for the full year.

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The bank has not only improved its performance on the vast majority of key metrics, but in doing so has also sailed past most analyst expectations. Total income in the latest quarter of £3.77 billion was an improvement of 5% on the previous quarter and 7% on the previous year, against estimates of £3.58 billion and prompting a guidance upgrade for the year to around £14.4 billion.

Net Interest Income (NII) of £2.9 billion played a large part here, again above estimates and bringing the total in the year so far to £8.3 billion. The so-called structural hedge, which lessens the group’s susceptibility to changes in interest rates and which many consider will be of particular benefit to NatWest, is also beginning to reap some further income rewards. 

Meanwhile, operating profit of £1.67 billion exceeded expectations of £1.46 billion, while profit overall for the third quarter of £1.2 billion was some 30% higher than the corresponding period.

At the same time, the group received a boost not only from higher loans, but also higher deposits. The latter had been the source of some concern for the high street banks as customers sought higher savings rates elsewhere and even now there is some evidence of locking in higher rates (and therefore lower margin to the bank) in anticipation of interest rate reductions over the coming months.

Even so, deposits rose by £2.2 billion in the quarter, while net loans to customers increased by £8.4 billion, driven largely by mortgage lending. The acquisition of the Metro Bank mortgage book was responsible for some £2.3 billion of this additional lending, with another £1.4 billion coming from elsewhere.

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Other key metrics also provide a reassuring tone, and in particular a Return on Tangible Equity of 18.3% in the quarter boosted the number to 17% in the year to date. As a result, NatWest has upped the full-year guidance number to be in excess of 15%, which seems both conservative and achievable in the current environment.

Elsewhere, a capital cushion of 13.9% is comfortably in range, while Net Interest Margin (NIM) of 2.18% is an improvement on the 2.1% of the previous quarter and of 2.05% in the first. A potentially sector-beating cost/income ratio of 47.6% in the latest quarter is also worthy of note, leading to a cumulative figure for the year of 52.8%.

There are some minor potential blots on the landscape, but these are containable within the context of the group’s overall strength. Speculation around a banking windfall tax in next week’s Budget remains rife, while an uptick in impairments within the Commercial & Institutional division needs to be kept an eye on.

Some early signs of strain at the corporate level have resulted in the bank making a precautionary addition to its impairment charge of £245 million. This brings the cumulative figure for the year to £293 million, although this level is significantly lower than the £452 million the previous year. In addition, 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, and levels of default overall remain low.

The recent UK election put paid to the likelihood of a potential retail offer for the government’s remaining stake in NatWest, which will cost the group over £20 million in costs associated with the potential float.

More positively, the government continues to reduce its stake in the bank, where its holding now stands at fractionally under 17% from the initial peak some years ago of around 84%, chiming with the shared ambition of returning NatWest to private ownership. It also progressively reduces the technical overhang of the stock as the holding reduces, which had been a headwind for many years. There may also be the option to continue to fulfil further government sales itself, which could potentially reduce the amount of share buybacks the group undertakes in the market.

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This extremely reassuring update comes against some heightened expectations, since NatWest has become the focus of strong investment attention in the recent past. The share price has risen by 74% over the last year, albeit from a relatively low base, as compared to a gain of 11.5% for the wider FTSE100.

Even so, the welcome reaction to the update in the context of a weaker wider market at the open is testament not only to improving fortunes but also to continuing support from investors. Given the share price hike, the market consensus has moderated slightly, although the general view of the shares as a buy remains firmly intact on what seems to be growing optimism for the bank’s prospects.