NatWest unexpectedly returned to profit in the third quarter thanks to a sharp drop in new provisions for bad debt, completing a clean sweep of better than forecast results among the UK’s largest banks.
Barclays, HSBC, Lloyds Banking Group and Standard Chartered all beat expectations in their third-quarter results over the past week, as did continental peers such as Santander.
Their performances have sparked discussion of whether banks have made it through the worst of the coronavirus pandemic and should be allowed to restart dividend payments despite fears about the potential impact of a second wave of infections.
However, despite a similarly strong quarterly report on Friday, Alison Rose, NatWest’s chief executive, sounded a note of caution about the outlook.
“Although impairments were relatively low in the quarter and we have seen some positive trends across our customer base, the full impact of Covid-19 remains very unclear,” she said. “Challenging times lie ahead, especially as the current government support schemes come to an end and as new Covid-19 related restrictions are introduced.”
Shares in NatWest jumped almost 6 per cent in early trading on Friday, with investors encouraged as the bank told analysts it was committed to returning capital to shareholders “as soon as possible”.
NatWest, which changed its name from Royal Bank of Scotland earlier this year, made a pre-tax profit of £355m in the three months to September, compared with a £315m loss in the same quarter last year and a £1.3bn loss in the second quarter of 2020. The figure was higher than even the most optimistic analyst forecast.
The main driver of the improved performance was a substantial drop in the bank’s net impairment charge, which fell from £2.1bn in the second quarter to £254m in the third quarter. NatWest said it now expected its full-year impairments to be at the lower end of its previously guided range of £3.5bn to £4.5bn. Revenues fell 17 per cent year on year, to £2.4bn.
The bank’s capital position was also boosted by progress in shrinking its investment banking division, which led to a reduction in its total risk-weighted assets. NatWest said these would now be lower than its previous guidance range at the end of 2020.
The bank's common equity tier one ratio, a key measure of balance sheet strength, rose from 17.2 per cent to 18.2 per cent over the quarter, and Redburn analyst Fahed Kunwar said the lender now had excess capital equivalent to almost half its £15bn market capitalisation.
Ian Gordon, an analyst at Investec, suggested that NatWest’s cautious stance reflected the fact that it was the UK’s largest lender to small businesses, leaving it particularly exposed if a fresh downturn caused more companies to struggle.
Ms Rose said many businesses were concerned that the coronavirus crisis would continue to affect their business for several months. “What businesses are doing to respond to these uncertain times is incredible . . . [but] the outlook does remain very challenging, and in the economic circumstances, the reality is not all businesses are going to survive,” she said.
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