Shares in high-street lender NatWest Group (NWG) bucked the positive trend set by rivals HSBC (HSBA) and Lloyds (LLOY) by dropping 4% to 195.5p, making them the worst performers on the FSTE 100, despite the bank reporting better than expected first quarter earnings.

First quarter operating pre-tax profits were £946 million, well ahead of both last year’s £519 million and the consensus of £536 million compiled by the bank. However, the possibility of fines for money-laundering sent investors scurrying for cover.

PROVISIONS BOOST EARNINGS

As with its rivals, some of the better performance was due to a release of provisions the bank had previously set aside for expected credit losses. On a net basis, the bank booked £102 million of writebacks compared with £802 million of charges last year and market expectations of a further £250 million of provisions for the quarter.

‘Whilst we continue to navigate a high degree of uncertainty in the wider economic environment, a net impairment release of £102 million in the quarter reflects releases in non-default portfolios, principally in Commercial Banking, as support schemes continue to mitigate realised levels of default’, said chief financial officer Katie Murray.

However, the ‘beat’ was also due to modestly better than expected net interest income, or the money the bank makes on loans minus the money it pays out on deposits.

Chief executive Alison Rose commented: ‘NatWest's profit in the first quarter is a result of a good operating performance in our core franchises as well as modest impairment releases that reflect the better than expected performance of our loan book across the first three months of the year.’

SILENCE ON DIVIDENDS

Like its rivals, NatWest saw a drop in its net interest margin, from 1.89% a year ago to 1.64%, and while operating expenses were flat the cost to income ratio jumped from 57.7% a year ago to 67.8% last quarter.

Oddly, there was no mention in the results of dividends, given the market is forecasting a yield of 5% for this year. The bank simply noted it had accrued £547 million of capital for ordinary dividends – equivalent to a pay-out of less than 2.5% - of which £200 million were put aside in the first quarter.

MONEY-LAUNDERING CLAIMS

Of greater concern however were fears that the bank could be hit with an unlimited fine for money-laundering claims.

In July 2017, the Financial Conduct Authority notified NatWest Group that it was investigating NatWest Group's compliance with the UK Money Laundering Regulations 2007 ("MLR 2007") in relation to certain money service businesses and related parties.

Last month, the FCA notified NatWest Group that it had commenced criminal proceedings against it for offences under the MLR 2007 for alleged failures to comply with regulations between 11 November 2011 and 19 October 2016, arising from the handling of the accounts of a UK incorporated customer.

NatWest will be required to attend an initial hearing at Westminster Magistrates' Court on 26 May 2021. 'Material adverse collateral consequences, in addition to further substantial costs and the recognition of provisions, may occur as a result of these criminal proceedings', the bank said.

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Issue Date: 29 Apr 2021