Friday 31 July 2020 10:52 am

Natwest sinks to a loss as it sets aside £2.9bn for bad loans

Natwest sunk to a pre-tax loss of £770m in the first half of the year as it set aside billions of pounds in anticipation of loans turning sour due to the coronavirus pandemic.

The banking group – known as RBS until earlier this month – took a hit of £2.86bn in the first half to cover expected loan losses. That was up from £323m in the same period a year earlier.

Read more: Lloyds swings to loss as it sets aside extra £2.4bn for bad loans

Natwest shares rose one per cent to 107.1p, however. Investors were encouraged by a jump in its capital buffers, indicating financial strength.

The figures

Natwest swung to an operating loss before tax of £770m in the six months ending 30 June. That was down from £2.69bn in the same period a year earlier.

That took it to a basic loss per share of 5.8p from positive earnings of 16.9p in the first half of 2019.

Its impairment charges – money set aside to cover bad loans – rose to £2.86bn in the first half. 

The bulk of that came in the second quarter, when Natwest put £2.06bn to one side compared to £802m in the first quarter. It was higher than analysts’ estimates of £1.7bn.

The lender’s return on tangible equity, a key measure of bank profitability, slumped to minus 4.4 per cent in the first half. That was down from 12.1 per cent a year earlier.

However, its common equity tier ratio or capital buffer jumped to 17.2 per cent in the second quarter from 16.6 per cent in the previous three months.

Why it’s interesting

All UK banks have been hit hard by coronavirus. It has led to a record economic slowdown and therefore is likely to cause a spike in loan losses. But it has also seen the Bank of England slash interest rates to record lows, limiting profitability.

Natwest today said it expects total impairment charges for the year to be in the range of £3.5-4.5bn. Both Lloyds and Barclays also set aside hefty sums for loan losses this week.

The bank has lent out more than £10bn through the UK’s various government-backed coronavirus lending schemes. These investments could be particularly risky as unemployment rises towards the end of the year as government support for the economy is wound down.

Fellow lender TSB also reported a first-half loss today. It too set aside billions of pounds for expected loan losses.

Natwest, which changed its name from RBS earlier this month, is still 62 per cent owned by the taxpayer after the financial crisis.

What Natwest said

Natwest chief executive Alison Rose said: “Our performance in the first half of the year has been significantly impacted by the challenges and uncertainty our economy continues to face as a result of Covid-19.”

However, markets cheered her statement that Natwest has £6-£7bn of headroom above its required capital levels. This could allow it to pay dividends once the Bank of England lifts its restrictions.

“Natwest Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business,” she said.

Read more: Barclays braces for pandemic blow with extra £1.6bn cushion

In its outlook, Natwest warned that high levels of risks could further hurt the bank this year.

“The impacts of Covid-19 on the economy and the mitigating benefits of government support schemes remain uncertain and could result in changes to our financial results in upcoming periods,” it said.

What analysts said

Richard Hunter, head of markets at Interactive Investor, said: “The name may have changed, but the challenges unfortunately remain the same.”

He said the money that Natwest has put aside helps it navigate the “unknowns of the next few months”. Hunter said government schemes will “fade, leaving individuals and businesses increasingly to fend for themselves, among what is likely to be a challenging economic recovery in the UK”.

Yet he praised its £10bn in coronavirus lending. Hunter said it stems from a “desire to be seen as part of the solution to this economic crisis”.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “Natwest is by far the best capitalised big bank in the UK.” 

“But with clear growth options few and far between and dividends or buybacks off the table for now, we’re not sure the group’s able to make the best use of its position of strength.”