The FTSE 100 bank comfortably outpaced the £1.9 billion pencilled in by City analysts, with results published on Friday showing total income up 9.5 per cent year-on-year at just shy of £4.4 billion. Crucially for shareholders, its net interest margin, the gap between what the bank charges on loans and pays out on deposits, widened to 2.47 per cent from 2.27 per cent a year earlier.
Buoyed by the stronger quarter, NatWest told investors it now expects full-year income, stripping out one-off effects, to land at the “top end” of its previously guided range of £17.2 billion to £17.6 billion, citing “our latest expectations for interest rates and economic conditions”.
The numbers complete a hat-trick of bumper updates from Britain’s high-street giants, following similarly strong figures from Lloyds Banking Group and Barclays earlier in the week. Together they underline how the higher-for-longer rates regime, re-imposed by the energy price shock that followed the outbreak of war on 28 February, has transformed the economics of UK retail and commercial banking, at least in the short term.
Paul Thwaite, chief executive of NatWest, was at pains to play down any suggestion that the bank was simply riding a geopolitical wave. “It’s a good set of numbers but the numbers are driven by doing things for customers,” he said, pointing to deposits up 2.5 per cent year-on-year at £445.5 billion and net lending 6.6 per cent higher at £396.4 billion.
For the millions of households and small businesses on the receiving end, however, the numbers tell a more uncomfortable story. With inflation expectations climbing, swap rates, the wholesale benchmarks that lenders use to price fixed-rate mortgages, have jumped sharply. The average two-year fixed residential deal stood at 4.83 per cent before the conflict, according to data provider Moneyfacts, but has since climbed to 5.78 per cent. The Bank of England held its base rate at 3.75 per cent this week but warned that borrowing costs may need to rise “significantly” if price pressures persist.
Higher rates, of course, cut both ways. They flatter margins, but they also stress-test the loan book. NatWest set aside a £140 million charge to reflect the war’s likely drag on the economy, taking its quarterly impairment for expected credit losses to £283 million, up from £189 million in the same period last year. The bank is now modelling UK economic growth of just 0.4 per cent this year, with unemployment peaking at 5.7 per cent.
Thwaite was candid about the limits of forecasting in the current climate. “None of us know exactly how it’s going to pan out over the course of the rest of the year; a lot of that will depend on the duration of the energy shock,” he said.
For now, though, NatWest’s books are holding up. Katie Murray, the bank’s finance chief, said the lender had “not seen significant shifts in customer behaviour or signs of stress”, a guarded but pointed reassurance for investors mindful that today’s fatter margins could quickly be eroded if SME borrowers and mortgage holders begin to buckle under the weight of dearer debt.
For Britain’s small and medium-sized businesses, already navigating tighter credit conditions and weaker demand, the read-across is sobering: the banks may be thriving on the new rate environment, but the cost of capital for the rest of the economy is heading in only one direction.
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Natwest profits jump to £2bn as Iran conflict drives mortgage rates higher