NatWest Earnings: Good Quarter, but Net Interest Margin Outlook Remains Complex

No-moat NatWest NWG reported an overall good first quarter. Return on tangible equity of 19.8% can hardly be seen in a different light. Yet, flat net interest income quarter over quarter and uncertainty around deposit volumes and increasing pass-through rates while base rates are likely to continue to increase for the remainder of the year dampened enthusiasm on NatWest’s outlook. We maintain our fair value estimate of GBX 300 per share.

Net interest income came in at GBP 2,902 million, up 1% quarter over quarter but flat if we exclude nonrecurring items. The bank net interest margin grew 2 basis points to 327 basis points, which was expected given the interplay of deposit margins and lending margins flagged already during fourth-quarter earnings. NatWest saw deposits decline 2.6% at the group level, which we don’t think is concerning but does weigh on net interest income progression. The bank highlighted higher tax payments and customers choosing to pay down debt as the core drivers of this dynamic. The interest rate pass-through in the quarter increased to 40% from 35% last quarter on interest-bearing deposits with the bank using a 60% pass-through in its rate sensitivity analysis pointing toward greater deposit betas for the rest of the year.

A good performance in fixed income trading and capital markets drove a good result in noninterest income, which increased 7% to GBP 918 million. Operating expenses of GBP 1.932 billion were down 6% from the quarter-ago period and in line with the GBP 7.6 billion full-year guidance. Loan loss impairments were benign at 7 basis points of total loans and well below full-year guidance of between 20 and 30 basis points.