NatWest Group (LON: NWG) shares rose 1% first thing this morning then fell back to level on the back of the release of the Q1 2022 interim management statement. This is akin to the first-quarter results but as we don’t have quarterly reporting these days – it fosters too short-term an outlook apparently – we don’t call it that any more.
The major economic point to note is as with the recent Lloyds and Barclays results. Banks benefit from rising interest rates: “Bank net interest margin (NIM) of 2.46% was 15 basis points higher than Q4 2021 principally reflecting the impact of recent base rate rises.” The background here is that banks live off that margin – the difference between deposit rates paid out and loan interest collected. The recent suppression of interest rates has compressed those margins – there’s a pretty sold bottom to deposit rates at nothing. As interest rates rise therefore those margins are widening.
This makes all of the domestic banks more attractive, their entire operating environment is getting better for them.
As to the rest of the results, they’re much as they were expected to be. That’s not unusual of course, for banks are likely to tell us of anything that materially changes their likely results. Attributable profit was £841 million, the return on tangible equity was 11.3%. Income before notables rose 8.6%, partly on growing business and the rest as above, on changes in those interest margins.
Turnover – not quite the right word for a bank but still – increased largely in line with the economy and GDP growth. NatWest isn’t taking substantial market share, nor is it losing it that is. Oddly, for a mature bank, this is not worrying – significant market capture would mean that pricing was out of line with others in that same market. And there’s a long history of banks coming to grief by doing that.
As to the future for NWG, it’s much as it is for the other British banks. There are two major processes going on. The first is those rising interest rates which, as above, expand margins. This is a definite positive for earnings and thus the bottom line over time. The higher interest rates go then the more this will be true.
The second is more of a worry, a down side. And that’s the general state of the economy. Banks are geared to macroeconomic conditions. A recession reduces profits – the interest margins might still be there but write-offs of unrecoverable loans rise, new loan volumes decline substantially. So, a medium-term view of NatWest, like the other banks, will have to take into account the possibility of a significant recession in the UK in the near future.
This is indeed possible, although the probability of it is widely disagreed upon. Any trading decisions need to depend upon that balance of probabilities – rising margins being a positive, recession worries a negative.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage . 68 % of retail investor accounts lose money when trading CFDs with this provider . You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money .
Tim Worstall is a freelance writer specialising in economics and the financial markets.