NatWest Swings to Profit As Pandemic Loan Provisions Dip

NatWest Group Plc swung to a profit in the third quarter as it reported fewer bad loans than expected and the partial lifting of Covid-19 emergency measures fueled consumer spending.

The Edinburgh-based lender took a charge of 254 million pounds ($328 million) to cover souring loans on Friday and said the total for the year was likely to be at the lower end of its range of between 3.5 and 4.5 billion pounds. It’s still on course for its worst year for provisions since a mis-selling scandal almost a decade ago, with the U.K. economy struggling through the pandemic.

“Challenging times lie ahead, especially as the current government support schemes come to an end and as new Covid-19 related restrictions are introduced,” Alison Rose, chief executive officer, said on Friday. About 50,000 of the bank’s own staff continue to work from home.

NatWest followed rivals Barclays Plc, Lloyds Banking Group Plc and HSBC Holdings Plc in making smaller provisions for expected defaults in the past week as British spending soared after months under lockdown. NatWest reported a 30% surge in debit card spending compared to the three months through June, while credit card spending rose 43% and mortgage applications increased by 91%.

The bank’s shares rose as much as 6.4% in early London trading.

NatWest posted a third-quarter operating profit of 355 million pounds, ahead of forecasts, even as net interest income fell slightly. Dividends across the industry are suspended, helping the bank retain capital and boost its closely-watched capital ratio known as Common Equity Tier 1 to 18.2%.

“NatWest is the best capitalized of the large mainstream U.K. banks,” Shore Capital analyst Gary Greenwood said in a note. “The group is well positioned to resume distributions to shareholders and expect the regulator will soon give the green light for it to do so.”

State Support

The U.K. government intervened to support 9 million jobs and boost the hospitality industry after imposing a lockdown in March to slow the spread of Covid-19. Banks, under pressure from regulators to be flexible with customers, offered payment holidays and interest-free overdrafts. Some of Britain’s state support, including the furlough program, is set to end this week even as lockdown measures are revived.

NatWest has given small businesses 7.9 billion pounds in state-guaranteed credit under the Bounce Back Loan Scheme, making it one of the biggest participants behind Lloyds. Demand is tapering off to about 700 applications a week, Rose told reporters. “This is a lot of extra debt companies are taking on and that will need to be repaid,” she said, adding that NatWest is “supporting customers we know” and “taking all the steps” to prevent fraudulent applications.

Rose said negative interest rates are not NatWest’s base assumption, following speculation that the Bank of England could take rates below zero to boost the economy. She added that the bank has no plans to charge for current accounts, despite some rivals including HSBC considering fees to counteract the cost of rock-bottom rates.

What Bloomberg Intelligence Says

NatWest Group’s significant CET1 beat at 3Q, improved guidance on expected 2020 provision charges and more resilient net interest margin provide a very healthy cocktail of good news, in similar light to both Barclays and Lloyds. Accelerated NatWest Markets restructuring and 7-9 billion pounds of capital headroom will return focus to capital-return potential in 2021.

-- Jonathan Tyce, BI banking analyst

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

The group said on Friday it continued to review its Irish unit Ulster Bank “appropriately and responsibly,” amid reports that it could shut the business. Ulster Bank’s future has been an open question since the financial crisis with successive CEOs weighing options for the bank. In 2015, it considered selling the lender, while a possible merger with another Irish bank has also been touted.

©2020 Bloomberg L.P.

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