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NatWest share price boosted by profits beat

NatWest share price: pedestrians walk past the entrance to a branch of NatWest.

For so long NatWest Group [NWG] has been the ugly duckling of the UK banking sector, but in the last 18 months there have been signs that it is putting its legacy problems behind it.  

Earlier this year the NatWest share price hit a three-year high before dropping to a one-year low in the wake of Russia’s invasion of Ukraine. The stock later recovered, returning to where it started the year and outperforming the likes of Lloyds and Barclays. And that was before this morning's strong Q2 results sent the NatWest share price 8% higher in early trading. 

In its last financial year, total profits came in at £2.95bn, compared to a loss of £753m the year before. After today’s Q2 and half-year results, the bank looks on course to comfortably beat last year's figure, much to the delight of shareholders. That club includes the UK government, though the government's stake in NatWest has fallen to 48.1% after it sold £1.2bn worth of shares at the end of March.

More importantly, the H1 numbers haven’t been flattered by the release of loan-loss reserves, which last year totalled £1.28bn.

Furthermore, CEO Alison Rose said earlier this year that the bank expects to maintain ordinary dividends of around 40% of attributable profit, and to distribute a minimum of £1bn to shareholders in both 2022 and 2023 via a combination of ordinary and special dividends. Today’s results delivered on that pledge. 

Q2 profits beat estimates

NatWest's second-quarter operating profit before tax was £1.5bn, in line with the year-ago period but well ahead of analysts' expectations for £1bn, driven by rising interest rates and mortgage lending. 

Attributable profit to shareholders rose to just over £1bn, pushing the half-year figure to £1.89bn, as net interest margins improved to 2.72% in Q2, up from 2.46% in Q1. Management expect net interest margin to be greater than 2.7% for the full year. 

Revenues for the three months to the end of June grew 47% on an annual basis to £3.2bn, beating analysts' forecasts of £2.9bn, mainly thanks to an increase in mortgage lending. The result lifted half-year revenue to £6.2bn.

Net loans to customers rose to £188.7bn in Q2, up from £184.7bn in Q1, marking an increase of £6.5bn for the first half of the year. Of this half-year increase, £5.9bn was attributable to mortgages, with lending evenly split between Q1 and Q2. The remaining £600m was made up of credit card and loan balances. Meanwhile, customer deposits increased to £190.5bn in Q2. 

Bank announces dividend

The bank announced an interim dividend of 3.5p per share, up 17% on 2021, and a special dividend with share consolidation of £1.75bn, or 16.8p per share, subject to shareholder approval. That adds up to 20.3p of dividends per share for the quarter.

On impairments, the bank seems to be swimming against the tide. While other banks have added to reserves to cover possible loan defaults amid the ongoing cost of living crisis, NatWest appears to be moving in the opposite direction, releasing £54m from reserves during the first six months of the year. Notably, the retail side of the business did add £26m to reserves, but this was more than offset by the release of funds in other parts of the business.

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