NatWest Shares Fall as Margin Pressures Overshadow Profit Surge

(Bloomberg) -- NatWest Group Plc beat profit forecasts in the third quarter, yet shares in the British lender fell as analysts highlighted a squeeze on loan margins and the bumpy transformation of its markets unit. 

The U.K.’s biggest corporate lender said operating profit before tax rose to 1.07 billion pounds ($1.5 billion), almost double analyst estimates compiled by Bloomberg. 

While demand for home loans was strong, margins on new mortgages fell during the quarter, which NatWest said reflected rising swap rates and continued strong competition. Borrowers are bracing for a hike in interest rates in the coming months after ultra-low rates during the pandemic. 

Shares fell 5.4% at 8:53 a.m. in London, the biggest intraday fall since May. “Overall a solid set of results but driven by items that are unlikely to drive the shares and there is no further update on capital return at this stage,” analysts at Citigroup Inc. said in a note. 

NatWest Markets reported operating losses of 160 million pounds, which the bank said reflected continued weakness in fixed income, where there was quieter customer activity as it reshaped the business. Analysts at Morgan Stanley said the markets performance was “poor.”

NatWest also took a charge of 294 million pounds after pleading guilty to three criminal charges of money laundering earlier this month. The Financial Conduct Authority is yet to announce how much it will fine NatWest for failing to properly monitor one of its customers for five years through 2016.

On a more positive note, the bank released 242 million pounds it had set aside for loans going bad in the early stages of the Covid-19 pandemic. Its rosy outlook for the economy follows an upbeat forecast from rivals including Lloyds Banking Group Plc, which said on Thursday it would take an impairment credit for the year. 

“Although we are seeing challenges in the economy and for our customers -- especially around supply chains and the cost of living -- a number of key indicators remain positive,” Chief Executive Officer Alison Rose said on Friday. “Growth is good, unemployment is low and there are limited signs of default across our book.”

What Bloomberg Intelligence Says:

NatWest’s 3Q headline beat on many lines, with strong capital and payout potential, but fails to offset disappointment that net-interest-margin progress and the outlook continue to lag behind major domestic peers. Slowing mortgage growth -- as pricing cuts end and reverse -- will remove a key growth driver, with excess liquidity needing to be reinvested to cover the shortfall.

-- Jonathan Tyce, BI banking analyst

Once one of the world’s largest banks, NatWest has been transformed into a largely domestic retail lender following a string of scandals. The U.K. government continues to sell down the stake it acquired during the financial crisis over a decade ago. Rose has started a fresh restructuring of some businesses including the markets unit and the Irish operations while steering the bank through the pandemic.

©2021 Bloomberg L.P.