NatWest: weak interest margins add a Rose tainted outlook

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In autumnal London, when it rains it can pour. On Friday, NatWest shareholders got drenched.

Disappointing third-quarter results came with an acknowledgment of the bank’s poor treatment of a former customer, Brexit cheerleader Nigel Farage. Its share price fell as much as 17 per cent on Friday.

The results confirmed market sentiment that the benefits of Bank of England interest rate rises have passed. A third party investigation revealed that the bank had failed in its communication with Farage and its handling of his personal data. The Financial Conduct Authority will review the case.

NatWest’s net interest margin figure, though, caused the day’s furore. At 2.94 per cent, this was 19 basis points lower than the previous period, well below expectations. Shares have now fallen by 30 per cent since the start of the year, much worse than those of rival Lloyds.

The bank’s margins are under pressure as customers shift funds from zero interest rate current accounts into higher yielding term deposits. NatWest claimed this move occurred more quickly than expected in the last quarter.

Worse, the competition for UK deposits is fierce. In the broader market banks are seeking out deposits to help repay the BoE for pandemic-related loans to smaller companies. This demand adds upward pressure on deposit rates when banks must also fight over mortgage customers.

NatWest slightly reduced its NIM full year outlook to around 3 per cent. But that will translate into lower revenues and earnings. Should NIM stabilise at 2.85 per cent, earnings forecasts for 2024 should then fall by 15 per cent, notes Citi.

True, the valuation may reflect much of the risk. NatWest was trading above its tangible book value at the start of 2023. Now it is 40 per cent below. Yet the interest rate tailwind has tapered off when both funding cost and loan pricing trajectories have reversed. That should give pause to bargain hunters.