29th Oct 2021 09:37
(Alliance News) - NatWest Group PLC on Friday said it delivered a strong operating performance in the third quarter, but the state-backed bank's shares fell in early trading in London.
Shares in the Edinburgh-based lender were down 4.0% in London on Friday at 222.49 pence each, the worst FTSE 100 performer.
Sophie Lund-Yates, equity analyst at Hargreaves Lansdown, said: "A lot of attention's being given to the money put aside to pay for money laundering regulation breaches. Clearly this kind of issue is unsavoury, and with the [payment protection insurance] scandal only just disappearing in the rear-view mirror, it's uncomfortably common."
NatWest's litigation and conduct costs were GBP294 million, which included provisions for an anticipated fine pertaining to breaches of the UK Money Laundering Regulations 2007 and "other matters".
"However, a longer-term problem is lower yielding loans which have hurt the all-important net-interest margin. Natwest was keen to point out it's increasing mortgage rates, but the full effect of this won't show up until full year results. In the meantime, any updates on interest rate hikes would go down particularly well where Natwest is concerned, which is more exposed to the rate environment than some other banks," Lund-Yates added.
NatWest saw a bump in profit in the recent quarter thanks to the release of impairment provisions.
In the three months to September 30, the bank recorded a pretax operating profit of GBP1.07 billion, up sharply from GBP355 million.
NatWest made a credit release of GBP242 million versus a GBP254 million provision the year before.
Third-quarter attributable profit rose 10-fold to GBP674 million from GBP61 million as a result.
Total income in the quarter was up 14% to GBP2.77 billion from GBP2.42 billion last year. Net interest income rose slightly to GBP1.95 billion from GBP1.93 billion, while non-interest income surged to GBP820 million from GBP497 million.
"Excluding notable items, income was GBP99 million, or 3.6%, lower than the third quarter of 2020 principally in NatWest Markets, reflecting continued weakness in Fixed Income which was impacted by subdued levels of customer activity and ongoing reshaping of the business. The Currencies and Capital Markets businesses performed in line with expectations. Across the UK and RBS International retail and commercial businesses income increased by 4.4% reflecting strong balance sheet growth, principally in our mortgage book," NatWest explained.
NatWest's net interest margin slipped to 1.54% from 1.65% in the third quarter last year and was down from 1.61% in the second quarter.
Cost-to-income ratio improved to 69.6% from 74.5% a year earlier.
"Throughout the third quarter, NatWest continued to deliver a strong operating performance; growing in key areas and accelerating our digital transformation to improve customer experience and make our business more efficient," Chief Executive Alison Rose said.
"Our robust capital position means that we have been able to buy back GBP402 million of our shares to date whilst also investing for growth as we support our customers and drive sustainable returns to our shareholders."
The bank's CET1 ratio ended the third quarter at 18.7% compared to 18.2% three months earlier and up from 18.5% at December 31.
Rose continued: "Although we are seeing challenges in the economy and for our customers - especially around supply chains and the cost of living - a number of key indicators remain positive; growth is good, unemployment is low and there are limited signs of default across our book. We have a vital role to play in helping the 19 million people, families and businesses we serve in communities throughout the UK to thrive. Because when they thrive, so do we."
NatWest's loan book ended the quarter at GBP361.0 billion, down from GBP362.7 billion at the end of the second quarter but up from GBP360.5 billion at the end of 2020.
Customer deposits ended the period at GBP476.3 billion, up from GBP467.2 billion at the end of the second quarter and up from GBP431.7 billion at the end of 2020.
Looking ahead, NatWest said it expects risk-weighted assets to be below its previously guided range of GBP185 billion to GBP195 billion on January 1, 2022. The bank's risk-weighted assets stood at GBP159.8 billion at the end of the third quarter.
Richard Hunter, head of Markets at interactive investor, said NatWest's pretax profit figure was "comfortably ahead of expectations".
"These are not results to shoot the lights out, particularly given the strength of the numbers from its peers so far, but there are nonetheless some reasons to be cheerful."
Hunter noted that total income also beat market estimates, and NatWest showed it has "an extraordinarily robust balance sheet".
"The destination for this embarrassment of riches is not totally clear, although the ongoing reduction of the government stake and further returns to shareholders are most likely. The bank has already repurchased GBP400 million of its own shares against the GBP750 million programme announced at the interims, while the current dividend yield of 2.6% is not punchy but could also be the focus of a further increase."
HL's Lund-Yates agreed. "Approaching 19%, the CET1 capital ratio is rather too generous by some people’s books," she said. "What the bank decides to do with this is a crucial marker of the stock’s attractiveness – repurchasing larger chunk of the government’s remaining stake in the bank seems a likely candidate."
By Paul McGowan; [email protected]
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