Shares in high street lender NatWest (NWG) were top of the FTSE 100 leader board on Friday, rallying 5% to 123p after it reported an unexpected return to profit in the third quarter helped by lower bad loan provisions.

The bank posted pre-tax operating profits of £355 million for the three months to September against forecasts of a loss of £75 million and losses of £1.29 billion in the second quarter.

LOWER PROVISIONS

The main reason for the surprise swing to profit was a lower charge for bad and non-performing loans. Provisions were just £254 million compared with market forecasts of as much as £630 million, according to figures compiled by the bank.

Total net income for the quarter dropped 16% to £2.42 billion from £2.9 billion last year due to a much bigger increase in deposits than loans, a slight contraction in net interest margin, lower fee income and a drop in deal activity at the NatWest Markets division compared with the first half of the year.

Costs as a proportion of income remained stubbornly high, rising from 70.9% a year ago to 74.5% in the third quarter due to £232 million of ‘strategic’ costs which included £90 million of redundancy costs, a £34 million charge for IT spend and a £21 million property charge.

Notwithstanding, the bank’s Core Equity Tier One capital ratio jumped to a heady 18.2% thanks to a £7.6 billion reduction in risk-weighted assets, which the bank has to put capital aside for, principally in NatWest Markets.

NO CHANGE TO FORECASTS

In terms of earnings, the bank reiterated the guidance it gave at the half-year stage although like most of its peers it said it saw full year bad loan provisions at the low end of its projected range due to lower levels of default in the third quarter.

It also said it expected year-end risk-weighted assets to be below its previous forecast of £185 billion to £195 billion as it targets a £30 billion reduction at NatWest Markets.

However, even with its robust balance sheet and excess liquidity the bank made no reference to the possible resumption of dividends. Instead it simply observed that its ‘current capital position provides significant headroom above both our minimum requirements and our MDA (maximum distributable amount) threshold requirements’.

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Issue Date: 30 Oct 2020