At the end of a week it would probably rather forget, NatWest has published a decent set of half-year results. Our head of markets talks through the numbers.
Total income increased by a substantial 25% over the half-year, largely driven by strong lending growth where the retail banking unit saw further leaps in mortgage lending. The customer deposit outflows which had been seen during the first quarter, as customers sought better returns on their balances after years of a virtually interest-free environment, stabilised in the second quarter, although the initial withdrawals left their mark.
NatWest is taking few chances on the back of an environment in which some of its customers could increasingly be feeling the financial pinch. The bank 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.
While current levels of default remain stable and at low levels, a further loan impairment provision of £153 million takes the total to £223 million for the half. This is a prudent move in the circumstances and the group’s modelling should also highlight red flags if they emerge.
Set against this caution, the bank is in extremely good shape in virtually all of its key metrics. Compared to the corresponding period last year, the cost/income ratio has decreased from 56% to 49.3%, the Return on Tangible Equity has increased to 18.2% from 13.1%, and Net Interest Margin is currently running at 3.2% versus a previous 2.58%.
In addition, the CET1 ratio, or capital cushion, remains at a robust 13.5%, while the Liquidity Coverage Ratio improved by 2% to 141% from the first quarter, well in excess of both its own and regulatory requirements. Taken together, the operating pre-tax profit for the first half increased by an impressive 37% to £3.6 billion, despite some slight headwinds in the second quarter, as also clearly being experienced by the UK banks which have reported so far this results season.
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The strength of the balance sheet has also enabled another round of shareholder returns which total some £2.5 billion so far this year. The latest announcement is for a further share buyback of £500 million in the second half alongside an increase to the dividend which puts the projected yield at 6.5%, or a whopping 13.5% including special payouts.
In any event, the scale of the returns not only reflects the bank’s strength and confidence in immediate prospects, but is also a compelling invitation for income-seeking investors in particular.
The change at the helm of the bank will inevitably bring some uncertainty, and the remaining 39% government stake remains an overhang on the stock, although the determination to continue to whittle this down has already been declared and should progress. Alongside these issues, the bank is mindful of the potential deterioration of its customers’ fortunes, while it has slightly missed expectations on a couple of its business lines, such as the NIM outlook and second quarter NII.
Even so, some of that sting has been taken out of the share price reaction, with competitors having borne the brunt of any disappointment earlier in the week. That being said, investor tensions around NatWest’s turmoil at the top, let alone sectoral concerns, has seen the price slump by some 21% over the last six months.
Over the last year, the shares have fallen by 4%, as compared to a rise of 5% for the wider FTSE100, although this has affected the market consensus in a positive way, potentially on valuation grounds. Indeed, the general view of the shares as a 'strong buy' means that NatWest is currently the preferred play in the sector.
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