Natwest returned to profit during the third quarter, reporting forecast-beating earnings after setting aside a smaller-than-expected sum to deal with bad loans due to the coronavirus pandemic.
Natwest posted an operating profit before tax of £355m for the three months to September on an income of £1.9bn.
The figure beat the bank-compiled analyst estimates of a loss before tax of £75m for the period, but analysts had been expecting an income of £2.5bn.
Loan loss provisions lower than expected
However Natwest was able to return to profit after making a lower-than-expected provision for bad loans. The bank booked a further £254m credit loss provision – well below the £628m forecast.
Natwest said provisions for the year would be at the lower end of a £3.5-4.5bn range previously given, and that it had seen a “limited level of defaults across lending portfolios”.
Natwest shares rose as much as 5.5 per cent following the results.
“These results demonstrate the resilience of our underlying business and the strength of our balance sheet in the face of significant continued uncertainty,” said chief executive Alison Rose.
However Rose added that while loan loss provisions were “relatively low” in the quarter and the bank saw “some positive trends across our customer base”, the “full impact of Covid-19 remains very unclear”.
“Challenging times lie ahead, especially as the current government support schemes come to an end and as new Covid-19 related restrictions are introduced,” she said.
Challenging times ahead
The third quarter’s profit for Natwest came despite a £324m charge for buying back its own debt, as the bank redeemed some bonds set to lose their regulatory capital benefits and therefore become too expensive, it said.
Natwest had plunged into the red in the first half of this year on a £2.9bn provision against potential loan losses.
NatWest’s net interest margin – the difference between the money it makes on lending and pays out on deposits – came under further pressure in the third quarter. The measure fell to basis points during the period to 1.65 per cent.
However the bank strengthened its core capital ratio, with the key indicator of financial strength rising to 18.2 per cent to 17.2 per cent.
Surge in mortgage activity
Lenders have also been boosted by an active mortgage market in the UK amid surging demand post-lockdown as people rushed to take advantage of a stamp duty holiday.
Natwest booked £2.4bn of mortgage lending during the third quarter, with mortgage applications jumping 91 per cent on the previous quarter.
“We are undoubtedly seeing a lot of activity in the housing market and demand from our customers,” Rose told reporters, adding that customers had responded “very positively” to the stamp duty cut.
Natwest lent out £2.9bn to businesses under the government’s coronavirus support schemes during the quarter. The bank has now lent out a total of £7.9bn under the Bounce Back Loan Scheme (BBLS), which provides small firms with 100 per cent government-backed loans up to £50,000.
The lender has only accepted BBL applications from existing customers, and Rose said that demand for the loans had “tapered” since the “very high peak” after the scheme was first introduced and Natwest was now receiving around 700 applications per week.
The chief executive struck a cautious note on the outlook for the repayment of the loans amid the pandemic-related challenges facing small businesses.
Rose said it was “important that we continue to support customers” when the first BBLs repayments are due in May next year. “This is a lot of extra debt that companies have taken on,” she said.
‘No plans’ to charge for current accounts
UK banks are still under pressure amid uncertainty over the total financial impact of the virus remains and pressure on their profitability from record-low interest rates.
Natwest’s market capitalisation has halved this year amid uncertainty over the outlook for lenders. Shares in rival Lloyds have fallen by a similar amount.
Lloyds, HSBC and Barclays have all set aside smaller provisions in their third quarter results compared to earlier in the year, with government financial support measures helping to delay some of the economic fallout from pandemic to next year.
HSBC suggested earlier this week that it could start charging for current accounts in a bid to increase revenues in the current ultra-low interest rate environment.
Asked if Natwest would consider doing the same, Rose said it had “no plans” to charge customers for basic bank accounts.
She added that the bank already had around two million customers who pay for its reward accounts, and would consider “broadening our service provisions to customers”, with new offerings that could be “fee based”