No-moat NatWest NWG reported good fourth-quarter results, but guidance on further upside from net interest income in 2023 did disappoint. We maintain our GBX 300 per-share fair value estimate.
NatWest pumped the brakes on investors’ hopes of seeing further windfalls via net interest income increases this year. Guiding for a net interest margin of 320 basis points for full-year 2023, the same NIM it achieved in the fourth quarter of 2022 already, looks underwhelming. NatWest sees headwinds from product margins as well as deposit migration keeping a lid on further improvements through the year. This is very much in line with commentary and guidance Barclays had given during its fourth-quarter results. It is also true that the U.K. had been lifting base rates early to fight inflation and now sits closer to peak levels, which should slow NIM expansion. However, guidance assumes the base rate to remain 4% through the entire year, while markets are pricing in the base rate to top out between 4.25% and 4.50% this year. As such, guidance may still be overly cautious.
Fourth-quarter results were good, with total income up 15% on a sequential basis to GBP 3,708 million. Net interest income of GBP 2,868 million, up 9%, saw the NIM expand to 320 basis points from 299 basis points as wider deposit margins more than offset product margin declines, driven largely by mortgages. Noninterest income grew 13% to GBP 857 million on solid fees and commissions performance across subsegments and another good quarter within trading and other income. Operating expenses increased on a sequential basis, up 13%, but came in 8% lower on a year-over-year basis, which we believe is a better comparison. Cost guidance for 2023 assumes a 4% cost increase excluding litigation and conduct costs, driven predominantly by higher wage costs, which cannot be entirely offset by targeted savings in the year.
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