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NatWest share price slips on higher loan loss provisions, profits miss

NatWest branch

NatWest share price, along with the rest of the banking sector has been hit in recent weeks from the turmoil in UK bond markets, as well as speculation of a further windfall tax on their profits.

Currently the banks pay corporation tax at the standard rate, with an increase to 25% kicking in next year, along with an 8% banking levy on top giving an effective tax rate of 33%.

The shares have seen a rebound from the October lows, as bond markets have settled down and so far, NatWest has had a very solid first half of the year.

In July NatWest offered up a fairly decent set of numbers, announcing an interim dividend of 3.5p, as well as a 16.8p special dividend, after reporting a solid set of H1 numbers. After ten years of legacy issues and underperformance this was a welcome tonic for their shareholders of which the UK government is one.

Today’s Q3 numbers are a reminder if any were needed of how vulnerable banks are to the economic winds blowing through the economy, after the bank posted a modest Q3 attributable profit of £187m, a sharp drop from the £1bn profit in Q2. While this is a sharp drop on Q2 as well as last year there are some notable factors at play.

The main reason for this profits slide was due to a loss of €652m on the discontinued Ulster Bank operations and the reclassification of the mortgage book so is very much a one-off.

It is notable that NatWest has taken more aggressive action with respect to impairments.

In H1 impairments were a modest £26m, however today’s numbers have seen that provision increased by £247m, while operating expenses also saw a sharp increase compared toQ2, to just shy of £1.9bn, although they are still lower from a year ago.

When all of this is stripped out the underlying performance was still slightly weaker than Q2 as operating profits came in at £1.09bn, slightly shy of expectations, and a £310m fall from Q2.

As far as the internals are concerned the higher interest rate environment has seen net interest margin increase in Q3 to 2.99%, bringing NIM year to date up to 2.73% from 2.59% in H1.

On the business side of things net loans have risen steadily throughout the year, rising to £192.8bn in Q3, and up from £188.7bn in Q2 and £184.7bn in Q1. This increase was mainly down to new mortgage lending of £3.9bn.

Customer deposits increased to £190.9bn, a rise of £400m.

On the outlook NatWest said they expect total income to be around £12.8bn with NIM expected to rise to 2.8% by year end.

The bank also said that despite concerns about the outlook and higher impairments that their customers weren’t showing any signs of loan distress.


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