Shares in Natwest (NWG) are trading down 2.5% to 200p despite the group announcing first half results ahead of expectations.

This disconnect reflects justified market scepticism around a larger than expected provision release that has significantly flattered the results.

The £707 million release of provisions that were intended to cover pandemic induced losses, has been justified on the grounds that the UK economy is improving. However, this release should be viewed as an exceptional, one-off item, and it draws into question the sustainability of the group’s improved performance.

Interest rates remain at historically low levels. This makes for an increasingly challenging environment for the group.

PRESSURE ON CORE PROFITABILITY

Lending to consumers and corporates is a core component of NatWest’s business. An anaemic interest rate compresses net interest margins (the difference between the rate at which Natwest can borrow money and the amount it charges its customers for borrowing) reducing the level of underlying profit.

The group announced a pre-tax profit of £2.5 billion for the six months to June. This was ahead of an analyst consensus of £1.8 billion. Statutory earnings per share of 10.6p were ahead of a consensus forecast of 5.6p. The interim dividend of 3p was marginally ahead of a consensus forecast of 2.8p. The group has also proposed a £750 million share buy back.

Shore Capital banks analyst Gary Greenwood commented: ‘We expect the announcement of additional shareholder distributions to be welcomed by the market, although income investors may have preferred a special dividend.’

(By Mark Gardner)

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Issue Date: 30 Jul 2021