28th Apr 2023 11:53
(Alliance News) - NatWest Group PLC is on much stronger footing than it was 15 years ago, but the recent turmoil in the banking sector has invoked memories of the financial crisis that resulted in it needing a government rescue.
The negative reaction to NatWest's first-quarter report showed just how much work it has to do to "earn the trust of the market", AJ Bell analyst Russ Mould commented.
NatWest's stock slid 4.7% to 259.50 pence each in London on Friday morning.
The UK government currently holds a 41.5% stake in the lender, following a taxpayer bailout in 2008 of what was then Royal Bank of Scotland Group. Last month, the government reaffirmed its commitment of disposing of all of its stake in the bank by 2026.
The FTSE 100 constituent reported an earnings rise, though this was overshadowed by its net interest margin undershooting loftier expectations.
NatWest's first-quarter net interest margin improved year-on-year to 2.25% from 1.51%. It was up from the 2.11% achieved in the fourth quarter. However, NatWest had been expected to achieve a net interest margin of 2.34% for the first quarter, according to company-compiled consensus.
Analysts at Shore Capital Markets commented: "Net interest income and margin was weaker that consensus expected, which may disappoint the market, especially given the consensus appeared to have got a little carried away in its optimism. There was also a modest deposit outflow (worse than expected) which management puts down to increases system liquidity and competition, and the group now expects deposits to be modestly down for the year."
NatWest said customer deposits, excluding central items, shrank by 2.6% to GBP421.8 billion from GBP432.9 billion at the end of 2022. The figure does not take into account Treasury repo activity and Ulster Bank Republic of Ireland.
NatWest said its first-quarter pretax profit totalled GBP1.82 billion, up 49% from GBP1.22 billion. It reported a profit before impairment losses or releases of GBP1.89 billion, up 59% from GBP1.19 billion a year prior.
Impairment losses amounted to GBP70 million in the first quarter, down from GBP144 million in the fourth quarter, but swinging from a release of GBP36 million a year earlier.
Total income climbed 29% year-on-year to GBP3.88 billion from GBP3.01 billion.
Looking ahead, NatWest reiterated its full-year guidance. It expects to achieve a return on tangible equity of 14% to 16%, up from 12.3% in 2022. It anticipates income excluding notable items of around GBP14.8 billion, up 13% from GBP13.06 billion in 2022, and a net interest margin of 3.20%, higher than 2.85% in 2022.
NatWest had based that NIM guidance on a Bank of England base rate of 4.00% for the rest of 2023. However, the bank rate is currently at 4.25%, following a 25 basis point increase at the end of March.
Edison analyst Robert Murphy believes NatWest faces a tricky remainder of 2023.
"Despite the profit beat, management has maintained its outlook. With deposits continuing to fall and a negatively sloped yield curve in the UK, there is a likelihood of a more challenging net interest revenue environment going forward," Murphy explained.
RBC Brewin Dolphin analyst Zoe Gillespie was a bit more reassured by NatWest's drama-free results.
"Compared to just a few years ago, NatWest's updates have become reassuringly dull. The bank continues to make progress, with another set of solid results which have beaten expectations. Profits are up, bad debt levels remain stable, and its net interest margin has risen again, buoyed by a higher base interest rate environment. Following on from Barclays' results, NatWest shows that – despite the wobble of a few weeks ago – the UK's major banks appear to be relatively resilient and are well prepared should the macro-economic backdrop take a turn for the worse," Gillespie added.
By Eric Cunha, Alliance News news editor
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