NatWest: no danger that bank will waste a good crisis

Banks are barometers of the UK economy. Strikingly, NatWest reckons the outlook is fair, not stormy. On Friday, the UK lender’s share price jumped as it issued an upbeat statement, a surprise special dividend and a big upgrade to its guidance on expected returns.

Its confidence at a time of mounting economic anxiety might seem odd, given that bad debts historically soar in downturns. But NatWest has not been lending aggressively and it detects no signs of distress or default.

Though the poorest Britons are badly squeezed, they tend not to borrow from the likes of NatWest. Many of the rest are cushioned by the cash deposits built up during the pandemic. The bank also expects impairment charges to stay below the through-the-cycle loss rate of 20 to 30 basis points next year.

NatWest is flush with cash, with £76bn of excess liquidity. Like its rival high street banks, it has no need to woo depositors with generous rates. It has passed on just 15 per cent of the recent rate increases. Its net interest margin — the difference between the interest income generated and the amount of interest paid out to lenders — rose 26 basis points over the quarter to 2.72 per cent.

NatWest, which expects a further 75 bps increase in the UK base rate to 2 per cent by the end of the year, is well-positioned for a further boost to profits. Its revised target return on tangible equity of 14-16 per cent in 2023 is likely to be the best of the UK clearers, says Shore Capital analyst Gary Greenwood.

Even after the £1.75bn special dividend, NatWest’s CET1 ratio will — at 14.3 per cent — be above its 13-14 per cent target. Friday’s 8 per cent rise in the share price closed nearly half of the discount to the tangible net asset value of 267p.

During a prolonged era of rock bottom interest rates, big discounts to book value became the norm in the banking sectors. The returns made possible by rising interest rates merit a rethink.