NatWest shares punished for uninspiring results

Third-quarter results were safe but lacked the sparkle seen in numbers from banking rivals. Our head of markets explains.

These are not results to shoot the lights out, particularly given the strength of the numbers from its peers so far, but there are nonetheless some reasons to be cheerful if you're a NatWest (LSE:NWG) shareholder.

The theme of the reporting season has been a release of credit impairments and NatWest is no different, with a release of £242 million for the third quarter given an improved macroeconomic outlook. This has contributed to a pre-tax profit figure of £1.1 billion, as opposed to a previous loss of £355 million, and is comfortably ahead of expectations. 

In addition, total income has also surpassed estimates, rising to £2.8 billion from £2.4 billion a year ago. Underpinning the growth is an extraordinarily robust balance sheet, where the capital cushion has risen to 18.7% from 18.2% in the previous quarter, and where the Liquidity Coverage Ratio stands at 166%.

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The destination for this embarrassment of riches is not totally clear, although the ongoing reduction of the government stake and further returns to shareholders are most likely. The bank has already repurchased £400 million of its own shares against the £750 million programme announced at the interim results, while the current dividend yield of 2.6% is not punchy but could also be the focus of a further increase.

There are, however, a number of niggling metrics which mean that these results are rather less inspiring than those of its rivals. The return on Tangible Equity figure of 8.5% has slipped from 11.7% the previous quarter, while Net Interest Margin has also dipped to 1.54% from 1.61%. The cost/income ratio of 69.6% is an improvement from the previous year’s figure of 74.5%, but an increase from the 65.7% number reported at the interims.

At NatWest Markets, ongoing weakness in the Fixed Interest business has contributed to a 62.5% decline in income, while for the group overall the increase in customer deposits and decrease in net lending both work against what would otherwise be more profitable lines. Further out, NatWest remains relatively cautious in leaving its full-year guidance unchanged.

The results contain some elements for optimism, however, with further strength in the mortgage book and something of a return to unsecured lending growth underpinning the improved income figure. 

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In all, the numbers are safe but lack sparkle. The share price has seen a strong recovery over the last year, having risen by 101% as compared to a hike of 30% for the wider FTSE100. On a two-year view, however, the shares have added just 3.5%, underlining the fact that the bank is edging back to pre-pandemic levels and has not necessarily entered the next phase of growth.

The market consensus reflects the generally positive but guarded view on prospects, coming in at a "cautious buy".