NatWest has strong Q1 but still disappoints the City

NatWest Group (LSE:NWG) continues its recovery from historic woes, with a strong performance compared to the same period last year, although rather less robust when compared to the previous quarter.

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Nonetheless, and finally free of its government share stake shackles, NatWest is now enjoying a new lease of life. Its prodigious cash generation has enabled a generous round of shareholder returns, while it apparently remains on the acquisition trail, even if some questioned the £2.7 billion price paid for its recent purchase of Evelyn Partners in the wealth management space.

Indeed, this new-found freedom has already enabled a more aggressive acquisition policy, with NatWest having previously made what it described as two significant purchases in the form of Metro Bank’s mortgage book and Sainsbury’s Bank, both of which it would appear have been integrated seamlessly. In addition, there is little doubt that the acquisition of Evelyn Partners will lift the Private Banking and Wealth Management business to another level. 

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The performance in the first quarter was slightly ahead of expectations and breezed past the corresponding period. Total income of £4.36 billion was 9.5% ahead of the previous year, and operating pre-tax profit of £2 billion was 12.2% higher. Within its three main units, operating profit rose by 4% to £781 million in Retail Banking, by 22% to £94 million in Private Banking and Wealth Management and by 1% to £1.03 billion in Commercial & Institutional (C&I).

Revenue generally was boosted by loan growth, higher customer balances and structural hedge income. Net Interest Income grew by 12% to £3.39 billion, while lending increased by £7.2 billion due to strength both in retail mortgages and C&I, and deposits by £3.1 billion, with customer impairments of limited concern. 

NatWest had previously described its own “intelligent approach to risk” as including a proactive attitude for those customers who may be approaching some level of financial strain, and levels of default overall remain low and stable. Nonetheless, the group has taken a charge of £283 million, including £140 million arising from modelling of MES (multiple economic scenario). Of course, the number represents a prudent provision rather than any actual underlying deterioration in credit.

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The outlook targets for NatWest have been slightly upgraded, but there is likely to be some disappointment given that they are seen as perhaps overly conservative. While the group has now stated that total income should now be at the top end of its previously guided £17.2 billion to £17.6 billion range, the remainder of its targets remain unchanged.

There are few concerns with NatWest’s stability and balance sheet strength, as evidenced by the key metrics. The capital cushion, or CET1 ratio, rose to 14.3% from 13.8%, the Return on Tangible Equity slipped slightly to 18.2% from 18.5% while Net Interest Margin improved to 2.47% from the 2.27% previously recorded. Along with the higher income, an additional £100 million of cost savings were achieved in a quarter, leading to a sector-beating cost/income ratio of 46.5%, notably lower than the 48.6% from last year.

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With high performance comes high expectations, and NatWest has slipped today in terms of outlook rather than delivery. The slightly bearish reaction to the numbers reflects the disappointment, although in context it does little to derail the group’s onward march. 

The shares have risen by 22% over the last year, as has the wider FTSE100, and by 90% over the last two years. The current dividend yield of 5.6% is another strong attraction amid the group’s generous shareholder returns programme and the market consensus of the shares as a buy is likely to stay in place, with NatWest continuing to push Barclays to become the preferred play in the sector.