NatWest Starts to Reverse Covid Provisions as Earnings Beat

NatWest Group Plc is the latest British bank to reverse some Covid-19 provisions and beat earnings forecasts in the first quarter as the economy surges out of the pandemic.

The U.K.’s biggest corporate lender posted an operating profit before tax of 946 million pounds ($1.3 billion) for the first three months of the year, 82% higher than a year ago as mortgage demand stayed high and commercial borrowers got help from the state.

“It’s very early days. We are still coming out of the lockdown,” Chief Executive Officer Alison Rose told reporters on Thursday. “There are reasons for optimism with the vaccine programs progressing at pace and restrictions being eased.”

The Edinburgh-based lender released a net 102 million pounds that was set aside to cover souring loans, defying analysts’ predictions that it would make further provisions. However, it took more cautious measures than rival Lloyds Banking Group Plc, which also beat forecasts and released provisions on Wednesday. HSBC Holdings Plc has also started to claw back the provisions it made in the early stages of the pandemic.

Shares dropped as much as 4.3% in London trading, having more than doubled from a trough in September. Costs were “heavier” than expected, in part due to the ongoing restructuring of NatWest Markets, according to analysts at Citigroup Inc.

“The key challenge for NatWest is generating revenue performance and that challenge is very evident in the numbers today,” said Edward Firth, analyst at Keefe, Bruyette & Woods. “We see these results as disappointing, particularly in the context of Lloyds.”

Early Days

Unlike some of its rivals, NatWest also refrained from upgrading its economic forecasts to reflect signs of resilience as the third national lockdown draws to a close. Rose said there were “positive signs” on U.K. growth and the bank will review its outlook later in the year.

The British economy has bounced back faster than expected, even before the government started to unwind restrictions imposed in January to halt the spread of Covid. More than half the population is at least partly vaccinated and cases are at their lowest level in months, although officials have raised concerns that new variants could still jeopardize the return to normal life. NatWest has transformed one of its offices in Edinburgh into a vaccination center, the bank said on Thursday.

To keep going through the pandemic, U.K. businesses took out 75 billion pounds in state-backed loans issued by banks including NatWest that will start to fall due this year. A recovery loan program designed to aid firms over the longer term had 3,000 applications in the first week, according to the bank’s presentation.

Laundering Hit

The bank also warned there could be “material adverse collateral consequences” from the money laundering charges pressed by the U.K. Financial Conduct Authority in March, including “substantial costs” and further provisions. “We are very disappointed,” said Rose.

NatWest is still part-owned by the government after one of the costliest bailouts of the financial crisis over a decade ago. In March, the U.K. government sold shares for the first time in almost three years to reduce its holding to 59.8%.

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