Natwest wrapped up a busy week for FTSE 100 banking earnings on Friday with an update that rocked Natwest shares and dragged the UK banking sector with it.

The headline comment from the NatWest Chief Executive set the tone for a cautionary update that signalled the bank was concerned about performance over the coming months.

“In a challenging environment, NatWest Group continues to deliver a strong financial performance; supporting our customers, responsibly growing our lending and making significant investments to transform the bank,” said Natwest Chief Executive, Alison Rose.

NatWest shares were hit not so much by what the company had reported in the third quarter, but more by what was to come. NatWest operating before tax for the nine months to 30 September was £3.7bn, up from £3.3bn in the same period a year prior.

“Although we are not yet seeing signs of heightened financial distress, we are very conscious of the growing concerns of our customers and we are closely monitoring any changes to their finances or behaviours,” Alison Rose said.

Indeed, NatWest – like all banks reporting this week – enjoyed rising revenue due to higher interest banks.

However, just as Lloyds and Barclays set aside cash for potential bad debts, NatWest also saw pressure on operating profits after provisions.

“The market did not like what it heard from Natwest one little bit on Friday. In one sense this was a surprise, the company upgraded its income forecast and revealed it had grown its mortgage business substantially,” said AJ Bell head of investment analysis, Laith Khalaf.

“While chief executive Alison Rose says there are no signs yet of families facing added financial distress, the material increase in provisions tells a rather different story.”

House prices

Banks have been providing their forecasts on the UK housing market this week and NatWest followed Lloyds yesterday in predicting a drop in average house prices in 2023.

NatWest shares were down over 9% to 224p at the time of writing.

It now appears that ‘unfavourable market conditions and inflationary cost pressures’ have combined to hit the ‘fast-growing UK floor coverings distributor Likewise Group (LON:LIKE).

In an early Trading Update, Tony Brewer’s group has found it necessary to announce that it is likely to see the 31 December year end results come in at some 2% below market expectations.

Those conditions include ‘the terrible war in Ukraine, political instability in the UK and a particularly hot summer.’

Overall, the net effect of that now seems to be to expect the current year’s figures to come in weaker than previously thought.  

Analysts Andy Hanson and Carl Smith at the group’s brokers Zeus Capital expect to see its current year revenues to almost double from £60.5m to £120.0m, while adjusted pre-tax profits could rise from £1.6m to £2.5m, while basic earnings will stand at just 1.0p, with a 0.2p dividend per share.

Looking forward to the coming trading year to end December 2023 the brokers prudently go for £136.6m sales, while profits could hold at around the £2.5m level.

The analysts state that despite the lower profitability in the near-term, they continue to see long-term earnings growth potential as the group continues to expand.

The group, which has a strong balance sheet worth over £40m in net assets, has seen its shares fall back to as low as 13p in reaction to the news, before recovering to trade around the 15.5p level.

At that price the group is only capitalised at £39.0m.

The shares may well gyrate for a short while before picking up again as further expansion shows through.

International Consolidated Airlines (LON:IAG) revenue has touched pre-pandemic levels in the third quarter as holiday makers returned to the market.

The jump in revenue was a result of rising passenger unit revenue as opposed to a greater number of people flying. Passenger unit revenue was 21.9% higher than in 2019 while IAG operated at just 81.1% of 2019 capacity.

“This is no doubt an impressive turnaround from BA’s parent company, and comes despite come ongoing headwinds. IAG has reported a significant step up in profitability for all its airlines, which also include Iberia, Aer Lingus and Vueling,” said Derren Nathan, Head of Equity Research at Hargreaves Lansdown.

“Planes are just as full as before the pandemic but IAG is flying less of them. Premium travel is right back up there and that’s going to help profits given the lower capacity, although the recovery in business travel has not been as robust.”

Passenger revenue was €14bn in the nine months to 30 September, up from €3bn in 2021.

IAG Outlook

A return to profitability will be welcomed by IAG’s investors and the group said they expect operating profit for 2022 to be in the region of €1.1 billion, but analysts warned a return to shareholder distributions are likely to be delayed.

“IAG is on track to achieve a significant full year profit,  but we’re a little disappointed that net debt is set to go back up between now and the year end, and we think a return to the dividend list could be some way off, particularly as times could start to get tough again,” Nathan said.

Amazon shares sank overnight as the online giant said they expected trading conditions to worsen through the rest of 2022 as inflationary pressures squeeze consumers.

Amazon was just one of many US tech companies this week blaming the economic environment for disappointing financial performance.

Meta, Alphabet, Microsoft and now Amazon are all concerned about how the financial health of their customers will impact growth through the winter.

Amazon shares were down over 12% in the premarket, despite sales rising 15% to $127.1 billion in the third quarter.

“Q3 results for Amazon disappointed largely across the board, with the biggest worry for investors likely coming from the guidance for the fourth quarter, traditionally the most important period of the year for e-commerce. Revenue expectations of $140-$148bn were well behind expectations and operating income’s a disappointment too, with a guide of $0-$4bn,” said Matt Britzman, Equity Analyst at Hargreaves Lansdown.

“The core e-commerce business has come under pressure from changing shopping habits from the boom seen over the pandemic and a consumer with less disposable income.”

Britzman attributed the slowdown at Amazon in part to their expansion plans, which he says has lifted costs.

“Clearly, Amazon went too big too soon on its expansion plans and it’s had to put the brakes on and then some to try and get costs back under control. Operating costs were up close to 18% in Q3, so those cost cutting actions haven’t made their way through as fast as we’d like to see, weighing heavily on the bottom line.”

The FTSE 100 rose on Thursday as robust profits at Shell helped support the index with both BP and Shell gaining on the day.

BP and Shell are among the largest FTSE 100 constituents and gains of 3.2% and 5.3% respectively added a significant number of points to the index.

There were also hopes central banks would soon start to slow the pace of interest hikes following disappointing earnings from US tech stocks.

Meta, Microsoft and Alphabet have all fallen heavily this week after earnings releases suggested consumers were starting to feel the pressure of inflation.

“US tech may be letting the side down when it comes to third quarter earnings but bumper profit from index heavyweight Shell helped lift the FTSE 100 on Thursday morning,” says AJ Bell head of investment analysis, Laith Khalaf.

“Once again, the wider market seems to be pinning some hopes on central banks looking at evidence of a deteriorating economy and reacting accordingly by slowing the pace of rate rises.”

The Federal Reserve, Bank of England and ECB will provide hints on the trajectory of interest rates in the coming weeks.

Shell

Shell had previously provided guidance on refining margins due to a falling oil prices which were a central element in Shell’s profit falling to $7bn in the third quarter, down from $18bn in the prior quarter.

Despite the sharp drop in profit from the prior quarter, Shell’s earnings were highly attractive to investors and shares rose over 5% as a result. Shell’s profit will support further distributions to shareholders after $6.8bn was paid in the last quarter.

Lloyds

Lloyds shares were largely flat on Thursday after the UK bank reported a 22% increase in underlying profit before impairment to £2.4bn. However, as with all UK banks updating the market this week, Lloyds were forced to set aside provisions for potential bad debts. Lloyds made provisions of just under £700m which say underlying profit for the quarter fall 17% to £1.7bn.

“Our income growth, balance sheet momentum and resilient customer franchise have enabled the Group to deliver a robust financial performance and strong capital generation, alongside updated guidance for 2022,” said Charlie Nunn, Lloyds Group Chief Executive.

Lloyds net interest margin is set to exceed 2.9% as a result of higher interest rates.

Shell shares rose on Thursday morning after the oil giant’s profits declined quarter-on-quarter as a result of lower oil prices. Shell’s profit wa well ahead of last year’s loss and the significant $7bn Q3 profit has drawn calls for a windfall tax.

However, the variability in Shell’s profit highlights the precarious nature of oil and gas businesses and fairness of a windfall tax, especially at a time they are investing in clean energy solutions.

“With oil prices down from their triple-digit highs this summer, it was inevitable to see big oil’s profits start to thin. However nearly $7bn in profits for the quarter is nothing to sneeze at, and is a far cry from the losses Shell suffered last year,” said Laura Hoy, Equity Analyst at Hargreaves Lansdown.

“Although the group isn’t printing money at record pace anymore, oil prices are still elevated by historical standards and that means Shell has more than enough to continue boosting shareholder rewards.”

Shell is one of the most widely held shares in UK pension funds and increased distributions will benefit almost all UK pensioners.

Shell profit

Shell income attributable to shareholders was $6.7bn in the third quarter, down from $18bn in the previous quarter. This compared to a $447m loss in the third quarter last year.

Shell recently said they expected refining margins to suffer in the quarter due to lower oil prices. Refining margins were indeed a key driver of falling profit in Q3 but margins remained elevated compared to last year.

Lower liquefied natural gas trading activity also hit profits during the period.

Clean Energy

There is an argument a windfall tax on oil majors such as Shell would be counterproductive in the push towards renewable energy. Shell is investing heavily in their Renewables and Energy Solution units and incurring significant losses as a result.

A windfall tax would like see spending in this unit reduce as its not yet a core revenue generator for Shell.

Shell shares were 3% higher at 2,367 at the time of writing.