Shares in NatWest saw a rise after the British lender released its fourth-quarter results, surpassing expectations. However, the bank anticipates a decline in income for the upcoming year due to the expected tapering off of higher interest rates that had boosted its top line in 2023. Despite opening in the red, shares traded around 5% higher at 225 pence as investors warmed up to the quarterly figures and digested the mixed outlook.
Lower Income Expected for 2024
NatWest projects total income, excluding notable items, for 2024 to be between £13.0 billion and £13.5 billion ($16.38 billion-$17.01 billion). This falls below estimates from a company-compiled consensus which predicts £13.765 billion. The bank acknowledges the need to adjust its expectations amidst an environment of anticipated falling interest rates. However, initial market reaction viewed the guidance as conservative, disappointing some analysts.
Record Revenue in 2023
In 2023, NatWest reported bumper revenue of £14.75 billion driven by interest income. This figure surpassed expectations of £14.60 billion. The bank attributes the strong performance to higher rates, lending growth, and a larger contribution from its markets business. These positive factors offset lower deposit balances and pressure on margins throughout the year.
Net Interest Margin Expectations Not Disclosed
NatWest did not disclose its expectations for net interest margin—the difference between earned loan interest and paid-out deposit interest—for the upcoming year. This lack of information frustrated analysts who closely monitor this metric's trajectory. In 2023, the bank posted a bank net interest margin of 3.04%, which aligned with expectations. However, the margin declined to 2.86% during the last three months of the year.
Strong Fourth-Quarter Results
For the quarter ending December 31, NatWest reported a total income of £3.54 billion, surpassing analysts' forecast of £3.38 billion. Net interest income slipped compared to the previous quarter, amounting to £2.64 billion against an expected £2.59 billion. The bank's pretax profit for the quarter stood at £1.26 billion, outpacing estimates of £1.02 billion.
NatWest Provides Guidance for 2024 and Beyond
NatWest, the bank in which the U.K. government has a 35% stake, has released its annual report, outlining its plans for the future. Despite reporting a strong return on tangible equity of 17.8% for 2023, the bank has guided for a slightly lower figure of around 12% for 2024. This is likely to disappoint investors, as it falls below the previous mid-term target of 13% to 14%. RBC Capital Markets noted that the downgrade had a "kitchen sink" feel to it, suggesting that the bank is being overly cautious in its projections.
In terms of balance-sheet strength, NatWest's common equity Tier 1 ratio stood at 13.4% at the end of December, meeting expectations. This is an important measure of the bank's stability and ability to withstand economic shocks.
Looking ahead, NatWest plans to launch an on-market GBP300 million share buyback in 2024. It has also proposed a final dividend of 11.5 pence per share, bringing the total payout for the year to 17.0 pence. These distributions to shareholders were seen as positive by many, although they were overshadowed by the news of the lowered profitability targets.
In other news, Interim Chief Executive Paul Thwaite has been appointed as the permanent boss of NatWest. This move provides continuity and stability for the bank, according to analysts. It also paves the way for a potential retail share offer later in the year, as the U.K. Treasury explores options to reduce its stake in the bank.
The government's significant ownership stake has been a burden on NatWest's shares for some time. However, once it is sold off, Interactive Investor believes that the bank will be freed from these constraints and become more appealing to retail investors.
Overall, while NatWest's profitability targets may have disappointed the market, the continued leadership and potential share offer indicate a positive path forward for the bank.
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