NatWest Q1 profit smashes expectations

The stars are aligning for NatWest Group (LSE:NWG), and this latest quarter has added to the growing momentum, prompting another upgrade to its guidance for the full year.

The imminent removal of the last vestiges of the government stake, which is now less than 2%, will in reality be more of a symbolic move than a turning point. Nonetheless the technical overhang of the stake had been a heavy weight on the share price and the group can at last move on.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

While the shares will likely never recover to the heady levels of almost £64 per share in 2007, that was of course a time when a bloated and overstretched Royal Bank of Scotland very nearly met its end. This NatWest is an entirely different beast with definite prospects and as the sector has been rerated, it has been the best performing UK bank in terms of share price appreciation over the last year.

Indeed, it remains to be seen whether this new-found freedom will enable a more aggressive acquisition policy, and NatWest has already recently made what it describes as two significant purchases in the form of Sainsbury’s Bank and a mortgage portfolio from Metro Bank. Its significant cash generation will provide an interesting dilemma on whether to continue to bolster shareholder returns, make further acquisitions, invest heavily in the business particularly in regard to growing digitalisation, or perhaps a combination of all of these options.

In the meantime, the numbers provide a comforting backdrop ahead of what could be a challenging time to come, both in terms of the embattled UK consumer as well as the wider shockwaves which may well accompany the current tariff traumas.

The lender has made a net impairment provision of £189 million, which is precautionary given that the current levels of default are stable and is certainly containable within the context of the group’s overall strength. NatWest has 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, which is not currently in evidence.

• Lloyds Bank Q1 profit falls amid tariff caution
• Barclays demonstrates strength in Q1 numbers
• HSBC beats Q1 forecasts but distractions loom

As such, the operating numbers are strong across the board. Total income of £3.98 billion was 14.5% higher than the year previous, and ahead of the expected £3.89 billion, helped along by a Net Interest Income figure of £3.03 billion which was 14.1% higher than the corresponding period and by the so-called structural hedge, which lessens the group’s susceptibility to changes in interest rates and which many consider will be of particular benefit to NatWest. Operating pre-tax profit breezed past the estimated £1.57 billion to land at £1.81 billion, an increase of 36.2% on the previous year and of 21.4% on the preceding quarter.

While it may be over simplistic to describe banks as basically providing loans and taking deposits, these are of course crucial planks and both are currently growing. The latter had been the source of some concern for the high street banks as customers sought higher savings rates elsewhere, but this exodus has ceased and deposits grew by 0.5%, while mortgage strength helped lift overall loans by 0.9% in the period.

NatWest's Commercial & Institutional business, which accounts for 54% of overall income, was bolstered by strong trading revenues and showed a Return on Tangible Equity (ROTE) of 19.3%. Retail Banking (39% of group revenue) saw the benefit of higher mortgage balances and had a ROTE of 24.5%, leading to an overall group number of 18.5%. This has prompted an upgrade to full-year guidance to the upper end of the previously estimated 15% to 16% range, while at the same time, total income was also updated to be skewed towards being at the top end of the £15.2 billion to £15.7 billion range.

Elsewhere, the capital cushion, or CET1 ratio remained comfortable at 13.8% versus a previous 13.5%, and the cost/income ratio improved further to 48.6% from 58.4%, helped by a decline of 3.6% in operating expenditure. A further update on shareholder returns is likely at the half-year numbers and in the meantime a dividend yield of 4.5% is an additional benefit to total returns along with the share price strength.

• Lloyds Bank and Aviva part of £9bn FTSE 100 dividend windfall
• Rolls-Royce ‘reassuring and bullish’ update pleases City
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

In all, this reassuring update comes against some heightened expectations since NatWest became the focus of strong investment attention. The share price has risen by 56% over the last year, as compared to a gain of 4% for the wider FTSE100, and is ahead by 18% in this calendar year alone.

While Barclays (LSE:BARC) has a marginal edge as the preferred play in the sector at present, the market consensus of NatWest as a comfortable buy echoes continuing optimism from investors on prospects for a revitalised bank.