NatWest warns UK rate hike may have peaked its earnings boost

NatWest warned that rising interest rates would not push earnings higher this year, overshadowing strong fourth-quarter results and sending shares sharply lower on Friday.

The British bank’s pre-tax operating profit tripled to £1.4 billion in the three months to December from £543 million a year earlier, in line with analysts’ expectations. Revenue rose 43 per cent to £3.7 billion compared to a consensus forecast of £3.6 billion, helped by Bank of England rate hikes.

But shares of the group fell as much as 9 percent in morning trade after NatWest warned that its net interest margin — the difference between the interest it earns on loans and the rate it pays on deposits — was at level the fourth quarter would remain at 3.2 percent this year.

Analysts had expected a rise to 3.38 percent after a series of rate hikes by the BoE, with rates hitting a 15-year high of 4 percent this month. NatWest’s forecast is based on the BoE holding rates steady for the remainder of 2023.

Analysts at Citi also drew attention to the £14.8 billion revenue forecast for 2023, down from £15 billion expectations.

“All things considered, we expect these results to disappoint given the weaker 2023 outlook,” they said. The results reflect disappointment with Barclays’ results on Wednesday, which also caused the stock to fall sharply.

NatWest’s weaker guidance came after a strong performance in 2022 with full-year operating profit before tax of £5.1 billion, up just over a third from last year and in line with analysts’ estimates. Revenue rose more than 25 percent to £13.2 billion, slightly above consensus forecasts of £13 billion.

Retail banking revenues rose 27 percent year-on-year as higher interest rates offset increased competition in the mortgage market. Interest rates have fallen significantly since the UK’s disastrous ‘mini’ budget in September.

Based on the results, the bank said it intended to launch an £800m share buyback program in the first half of 2023 and proposed a final dividend of 10p per share.

Provisions for bad loans came in at £144m, below analyst estimates of £247m, compared with a release of £269m in Covid-related provisions last year.

Operating losses for Ulster Bank’s continuing operations in Ireland were £354m in the fourth quarter, with costs largely attributable to exiting the market.

“From our perspective, we are well positioned for growth,” CEO Alison Rose said in a media interview, adding, “I can’t do it [the] Share price per day”, after a question about the bank’s performance.

Despite Friday’s drop, NatWest shares are still up 10 percent over the trailing 12 months.

The bank’s bonus pool grew by 23 per cent to £367.5m, reflecting “strong performance and progress against strategy”.

Rose’s total pay, including salary, pensions and bonuses, was £5.2m compared to £3.6m in 2021.

Howard Davies, chairman of NatWest, said direct comparisons were “apples and oranges” because the bank changed its remuneration policy at its 2022 annual meeting to include an annual bonus totaling £643,000.

The lender on whom the UK government is tackling the cost-of-living crisis after a £46bn bailout.

Last week, MPs accused Rose and other bank executives of being too slow in increasing savings while post-mini-budget mortgages were being rapidly increased. Rose initially refused to go to the meeting before deciding to attend.