NatWest swings to big profit, announces £750m share buyback
NatWest Bank swung to a full year profit as it released more than £1.2bn in cash set aside for loan defaults during the Covid pandemic and said it expected to achieve a return on tangible equity “comfortably” above 10% in 2023.
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The bank, 51% owned by the UK taxpayer, posted full-year operating pre-tax profits of £4bn compared with a £481m loss a year earlier.
It also said it would pay a 7.5p-a-share dividend and announced a £750m share buyback. This means NatWest will distribute more than £3.8bn of capital to shareholders, including £1.7bn to the taxpayer.
NatWest reduced its annual cost-cutting target to 3% from 4% for each of the next two years, citing inflation pressures and reinvestment.
Banks are betting on higher income after the Bank of England lifted rates twice in quick succession with further rises expected this year.
NatWest said its net interest margin, the difference between lending and savings rates, fell to 2.39% from 2.46%, but rose three basis points to 2.38 in the final quarter of 2021 compared with the prior three months. It now expected its income to grow to £11bn, up from £10.5bn in 2021.
Profits were hit by £466m of litigation and conduct charges, including a £265 million pound fine for failing to prevent the laundering of £365m, some of it deposited at a branch in bin bags.
The lender also said it had increased its bonus pool to £298m, a 44% increase, with chief executive Alison Rose seeing her pay rise to £3.6m, up from £2.6m at a time when the bank continues to shutter branches and people struggle with rising household bills with inflation well above 5.5% and rising.
AJ Bell analyst Danni Hewson said the bank's better than expected earnings and hike in the outlook were, "to some extent, baked in", adding that investors may be concerned about the possibility of an increase in bad debts as its customers face a cost of living crisis.
"This could outweigh any boost to profitability from higher (interest) rates," she said.
“Natwest seems relaxed on this score and has actually reduced its guidance on impairments – whether that view will be tested in 2022 remains to be seen. If it holds, then Natwest should be in a position to dole out more generous shareholder returns, which is a key attraction of investing in the sector. It should also enable it to further reduce the government’s stake by buying shares."
“Natwest has slipped a little bit behind target on cost reduction, thanks to higher inflation, which may be adding to some investor nervousness and the company is yet to see any progress on that key measure of profitability – net interest margin.”