NatWest punished for lacklustre Q3 results

NatWest Group (LSE:NWG) has rounded off the bank sector quarterly reporting season with a fair to middling performance which was not sufficient for the bank to upgrade guidance for the year.

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It has nonetheless maintained the previous forecast which was raised at the interim results, and continues to expect total income of around £17.9 billion for the year and a Return on Tangible Equity (ROTE) of 19% or greater.

Even so, as seen with Lloyds Banking Group (LSE:LLOY), the lack of an upgrade is a missed chance for the bank to underline its credentials. In the meantime, and on the way to this target, the third-quarter contribution was robust, with total income up by 7.1% to £4.64 billion compared to the corresponding period, and comprising 8.9% growth in Net Interest Income (NII) to £3.56 billion and of 1.6% in non-interest income to £1.08 billion. Operating pre-tax profit of £2.22 billion was up by 1.9% and marginally ahead of expectations.

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At its simplest level, the bank makes loans, takes deposits and looks to build Assets Under Management (AUM). On that basis alone, this was a strong quarter. Retail banking, which accounts for 39% of group income, saw growth of £1.2 billion in mortgages and £3.1 billion in deposits. Commercial and Institutional, the largest unit at 53% of overall revenue, saw loan growth of £6.7 billion, while deposits spiked by £3 billion. The Private Banking and Wealth Management arm may account for just 7% of group income at present, but managed to attract a further £1 billion of AUM over the quarter.

The key metrics contained an almost clean sweep of improvements, with ROTE of 21.6% bringing the total in the year so far to 20.2%, a capital cushion or CET1 ratio rising to 13.5% and ahead of the 13% target, and Net Interest Margin nudging up to 2.5% from the 2.37% previously recorded. Along with the higher income, costs are being contained and a sector-beating cost/income ratio of 45.1% was the result.

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More broadly, 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.

However, 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, and the early signs are promising.

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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 £277 million for the quarter, which represents just 0.24% of gross customer loans, partly arising from the modelling of MES (multiple economic scenarios). Of course, the number represents a prudent provision rather than any actual underlying deterioration in credit.

The generally positive update underpins the group’s previous announcement on shareholder returns, namely that it would consider share buybacks again alongside the full-year results, which would be six months ahead of schedule if actioned. In the meantime, a punchy dividend yield of 5.5% more than pays investors to wait in anticipation of further returns.

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The increase to the bank surcharge in the Budget earlier this week was less than feared, manageable and temporary and led to a small relief rally in the domestic banks. Unfortunately, this was erased by the poorly received Lloyds update yesterday which sent those shares 5% lower and read across to a dip of 2% for NatWest.

In addition, with high performance comes high expectations, but NatWest has missed the opportunity to broadcast its prospects today. The negative reaction to the numbers reflects some disappointment with the general tone of the update, shaving some of the 9% gain which the shares have made over the last year, as compared to a rise of 10% for the wider FTSE100, and of 69% over the last two years. Despite this bump in the road, NatWest is currently the preferred play in the sector and the market consensus of the shares as a strong buy is more than likely to stay in place.