NatWest shares fall on deposit outflows, despite forecast-beating Q1 profit

Shares in NatWest fell in early London trade despite the UK bank reporting better-than-expected first-quarter profit driven by higher interest rates, although there was a sharp drop in deposits as customers chased better rates as incomes were squeezed by rising inflation.

The lender on Friday said operating profit before tax of £1.8bn for the three months to March, compared with £1.2bn a year earlier and higher than the £1.6bn expected by analysts. Shares in the bank fell by 6% in London on the results.

There was also disappointment among analysts on the unchanged full-year outlook, which would leave revenue at £14.8bn, despite the Bank of England increasing the base rate to 4.25% in March, 0.25 percentage points above guidance at NatWest's last annual results.

Total income for the quarter soared to £3.8bn from £3bn a year earlier. Net interest margin – the difference between interest rates on loans and savings – increased to 3.27% from 2.45%.

Net loans to customers were up by £4.1bn, or 2.1%, mainly due to new mortgage lending of £3.9bn as demand for home loans started to recover after the turmoil caused by Truss government’s disastrous mini-budget, when hundreds of fixed-rate mortgages were pulled across the banking industry in response to £44bn in unfunded tax cuts.

Natwest said £11bn was withdrawn from customer deposits as a result of higher tax payments, competition for better savings rates and market volatility.

The state-backed bank put aside £70m for bad loans but added that loan arrears remained low and the charge was half the £144m booked in the three months to December 31.

“A drop in customer deposits, while nothing like on the scale seen at other crisis-ridden banks, has helped put the wind up investors in NatWest," said AJ Bell investment director Russ Mould.

“The gap between the amount NatWest charges for loans compared to what it pays out for deposits, also known as the net interest margin, is also tighter than many had hoped. This runs counter to Barclays’ own first quarter numbers which showed higher base interest rates were feeding into a strong net interest margin."

“It felt telling that full year guidance remained unchanged off the back the performance in the first three months of the year, including on the level of impairments, implying NatWest is expecting a deterioration in the credit outlook.

“Given its history of state ownership and uneven recovery from the credit crunch, NatWest has to work hard to earn the trust of the market and updates like today’s do not help."

Reporting by Frank Prenesti for Sharecast.com