NatWest: interest rate peak signals lower gains ahead

Politicians have hurled brickbats at bank bosses for failing to pass on the benefits of rising interest rates to savers. But Friday’s results from NatWest suggest the banking bonanza may have been overhyped. A more downbeat than expected outlook from the group formerly known as the Royal Bank of Scotland drove its share price down as much as 7 per cent. The reverberations hit Lloyds’ shares too.

The angst arose over the bank’s expectation of a tighter net interest margin (NIM) — the spread made from loans versus what is paid to savers relative to assets. It has been passing on higher rates to savers somewhat more rapidly than expected. Meanwhile competition has been heating up in the mortgage market. Rates have fallen since the UK government’s botched “mini” Budget in September.

NatWest thinks its NIM has peaked. It expects it to stay at 3.2 per cent this year. That is the same as it had achieved in the last quarter of 2022. It also thinks the Bank of England will not raise rates beyond the current 4 per cent. It anticipates that the next move will be lower in 2024. Analysts had been pricing in NIM that was 20 basis points higher for this year.

It is possible that this year’s profits might still meet analysts’ earlier expectations. NatWest’s guidance allows for provisions between 20bp and 30bp of its gross book. If the recession proved milder than it expects, reduced provisions would offset the lower NIM guidance.

An additional £800mn of market buybacks were announced on Friday. That was on top of the £1.2bn of its share buybacks last year that enabled the UK government to reduce its stake. That returned it to majority private ownership, in what was perhaps the biggest single achievement of 2022.

Taking Friday’s share price drop into account, the stock is expected to yield 5.6 per cent this year. Savers are already feeling more of the benefit from higher rates. A yield higher than most one-year term rates on offer should be enough to keep thriftier shareholders engaged too.