NatWest profit for 2022 rose by a third to £5.1bn as the lender confirmed higher interest rates bolstered earnings and they were yet to see financial distress among its customers.
The bank only set aside £337m in provisions for bad debts in 2022 which avoided an erosion of earnings and compounded higher net interest margins.
However, this seems to be a story for 2022 and markets were evidently concerned that provisions for bad debts would increase, and margins decrease, in 2023.
Interest Rates
The Bank of England have signalled a slowing in interest rate hikes that may culminate in lower rates towards the end of this year. NatWest recorded Net Interest Margin of 2.85% in 2022 and 3.2% in Q4 2022.
This level will be hard to maintain if rates fall towards the end of the year. NatWest themselves have forecast 3.2% Net Interest Margin for 2023 – should the base rate stay at 4%.
This would suggest NatWest’s key earnings metric has peaked and leaves them open for lower earnings, if interest rates fall.
These concerns proved too much for investors and NatWest shares fell as much as 8% in early trade, before recovering slightly.
“NatWest may have delivered its biggest profit since the financial crisis but investors are far more concerned about what’s coming next and that’s less positive,” said Russ Mould, investment director at AJ Bell.
“Income for 2023 is now guided to be lower than expected, with the key net interest margin metric also falling short. Costs are also set to be higher than forecast.”
“While impairments are anticipated to be a bit lower than estimates the market may be cautious of taking NatWest at its word given the difficult backdrop for consumers and businesses which could lead to a big increase in bad debts.”