NatWest Looks Beyond Pandemic With Dividend, Fresh Targets

(Bloomberg) -- NatWest Group Plc resumed dividends and set new targets as it attempts to hone the business for life after the Covid-19 pandemic.

Britain’s biggest corporate lender also announced it will gradually exit Ulster Bank, its Irish unit that has underperformed since the financial crisis over a decade ago. Allied Irish Banks Plc has provisionally agreed to buy 4 billion euros ($4.8 billion) of commercial loans and Permanent TSB Group Holdings Plc is in early talks to buy some retail assets.

NatWest posted an operating profit before tax of 64 million pounds ($89 million) for the fourth quarter, ahead of forecasts but down sharply from a year ago, resulting in an annual loss. The Edinburgh-based bank also set new targets for the coming three years to improve returns and reduce costs, and cautioned that Covid-19 continued to dampen its outlook.

“The short and medium term outlook continues to be subject to significant uncertainty,” Chief Executive Officer Alison Rose said on Friday.

Shares in the bank were up 1.6% at 10:13 a.m. in London, after losing as much as 1.9% earlier.

“There are a lot of moving parts,” said Fahed Kunwar, an analyst at Redburn. “The Irish business is set to be run down, but the timeframe is indeterminate as the sensitivities of a number of stakeholders needs to be managed.”

Bad Loans

The bank will resume dividends at 3 pence per share, a year after the Bank of England asked the industry to conserve capital for lending during the pandemic. The payment is the maximum allowed within the limits set by regulators in December, according to the firm. NatWest is one of the best-capitalized banks in Europe, with a CET1 ratio that rose to 18.5% at the end of the year.

The lender is also setting more money aside for a surge in struggling borrowers after the pandemic triggered the U.K.’s worst recession in three centuries. NatWest took a charge of 130 million pounds in the final three months of the year, taking its total provisions to 3.2 billion pounds -- less than it predicted in the early stages of the outbreak.

So far, NatWest has seen “relatively low levels of actual default,” with about 600 million pounds of its loan book considered to have gone bad. However, repayments have not yet started on the 14 billion pounds it has lent to businesses through government-backed support programs during the pandemic. The industry is working on setting up common protocols for the collection and recovery of those loans, Rose said.

Markets Shrinks

NatWest is still part-owned by the government after one of the costliest bailouts of the financial crisis over a decade ago. Rose changed the bank’s name from Royal Bank of Scotland Group Plc last year and is shrinking the firm into a domestic-focused lender.

Securities unit NatWest Markets has faced heavy cuts, with its assets falling by 40% over last year to 26.4 billion pounds and more reductions to come. The division still enjoyed the boost from volatile markets that lifted its larger Wall Street rivals during 2020, taking its underlying income up by more than a fifth.

“The work that has been done there has been very positive,” said Rose in a call with reporters. “It was using too much capital, it was not contributing to returns. I’m very comfortable with the decision we made.”

Other cost-cutting measures could include “new flexibility for staff” that requires less working space, Rose said, as well as an ongoing review of the branch network as the switch to digital services sped up during lockdowns.

Rose was paid 1.9 million pounds last year, less than half the maximum possible award, after forgoing a quarter of her fixed salary and any right to a bonus in light of the pandemic. Chairman Howard Davies, who also gave up 25% of his fixed salary, told reporters they currently have no plans to repeat the sacrifice this year.

NatWest’s new targets include:

• A return on tangible equity of 9-10% and a CET1 capital ratio of 13-14% by 2023
• Maintaining ordinary dividends of around 40% of attributable profit and distributing a minimum of 800 million pounds a year from 2021 to 2023
• One-time costs of about 800 million pounds this year to refocus NatWest Markets and other cuts
• Reducing overall costs by around 4% each year

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