NatWest Group Plc shares fell as the lender’s guidance stoked worries that the boost to margins from higher interest rates is starting to fade.
(Bloomberg) — NatWest Group Plc shares fell as the lender’s guidance stoked worries that the boost to margins from higher interest rates is starting to fade.
The British lender’s net interest margin was 3.27% in the first quarter and didn’t upgrade its outlook for 2023, despite the Bank of England boosting rates by 25 basis points since its full year results. Shares fell as much as 7% in London.
“The company is sensitive to interest rates going up and their prior guidance assumed 4% base rate and we are now at 4.25%,” Jefferies analyst Joseph Dickerson wrote in a message.
The drop came even as the bank beat estimates, partly due to lower provisions for bad loans. Costs rose in the face of stubborn UK inflation.
“The outlook remains a little bit uncertain, we’re still in challenging macro-economic times with rising interest rates,” Alison Rose, chief executive officer, said on Bloomberg TV.
The UK’s biggest corporate lender reported operating profit before tax for the first quarter of £1.8 billion ($2.2 billion), above analyst estimates compiled by Bloomberg of £1.55 billion. The result was 49% higher than a year ago.
NatWest’s costs increased 9% to almost £2 billion, including onetime items such as a £60 million cost of living payment for staff, but the bank said it’s still on track to meet guidance for the year.
NatWest set aside £70 million for potential bad loans in the quarter, compared with estimates of £270 million, and Rose said customers were “proving to be very resilient.” British lenders have begun to brace for a rise in borrowers struggling with cost-of-living pressures, yet rate rises have helped to improve banks’ margins after a decade of rock-bottom returns.
The results come a day after rival Barclays Plc reported a rise in its margins thanks to the increases in central bank rates.
What Bloomberg Intelligence Says:
NatWest’s banking net interest margin at 3.27% — 11 bps lower than analyst estimates — shows pressure from rising deposit costs, which could accelerate this year after £11 billion in deposit outflows in 1Q. The 12% pre-tax profit beat and nearly 20% return-on-tangible equity was driven by trading income and lower loan-loss charges, which may not be sustainable.
— Lento Tang, BI banking analyst
Rose said the mortgage market is set to be slower this year, with borrowing costs elevated compared to a year ago. “We are seeing predictions on house prices being affected, lower mortgage demand and it is expensive,” she said.
Once one of the world’s largest banks, NatWest has been transformed into a largely domestic retail lender. The government continues to sell down its stake after a bailout during the financial crisis over a decade ago.
–With assistance from Mark Cudmore and Anna Edwards.
(Updates with details from media call.)
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