NatWest Group plc beat earnings estimates in the first quarter (1Q) as lending and deposits increased while customers started to feel more confident.

The London-listed bank reported pretax operating profit of £1.3 billion , compared with analysts’ expectations compiled by Bloomberg of £1.28 billion. That was down 27% from a year ago as the boost from higher interest rates starts to fade. 

The firm said its net interest margin - a key measure of profitability that shows the difference between what a bank pays for deposits and collects on loans - slipped to 2.05% compared with 2.25% a year ago, due to changes in central items.

“In the underlying business we were basically flat,” Katie Murray, chief financial officer, said on a call with journalists, adding that the squeeze on mortgage margins over the last couple of years had more or less stabilised. 

British banks have been competing for a smaller pool of borrowers after the spike in interest rates priced out many potential homeowners. NatWest’s mortgage lending was £5.2 billion in the quarter, down from £9.9 billion a year ago, which the bank offset with more lending in its commercial business. Total net loans rose 0.4%, while customer deposits rose 0.2% to £433 billion. 

Shares in NatWest rose as much as 4.1% in early trading to the highest in 14 months. The shares were 3.2% higher at 8.49am. 

Improving conditions

“Though macro-uncertainty continues, customer confidence and activity is improving, with both lending and deposits up in the quarter and impairments remaining low,” chief executive officer Paul Thwaite said in a statement. 

Earlier this week, rival Lloyds Banking Group plc reported pressures on its margins as lenders try to navigate an uncertain path to lower interest rates. Traders have recently scaled back their bets on Bank of England (BOE) cuts, implying the journey down from 5.25% will take longer than previously expected as the UK economy recovers from several years of high inflation. 

NatWest put aside £93 million to cover bad loans in 1Q, compared with analysts’ expectations of £174 million, and up on the £70 million seen a year ago.

Operating expenses were £64 million higher than a year ago, reflecting the BOE levy and increased staff costs due to inflation and severance.

“Overall a stable set of results which, given the improving conditions and higher rates, are a positive,” said Fahed Kunwar, head of banks and equity research at Redburn Atlantic.

The bank is gearing up for what is poised to be the country’s most high profile privatization this year, with the UK government preparing to sell some of its remaining 28.9% stake to retail investors in the coming months. The state has owned a part of the bank since the 2008 financial crisis. 
 

  - Bloomberg