The UK government is in line for a £1bn payout from its near-50% stake in NatWest Group despite a dip in the bank’s second-quarter profits and “uncertainty” over the UK’s economic outlook.
NatWest revealed on Friday it was poised to issue dividends worth 20.3p a share, after reporting “strong growth” in lending and deposits across the business, thanks in part to rising interest rates that meant it could charge borrowers more for loans and mortgages.
Almost half of the dividends – about £1bn – will be given to the Treasury, which still owns 48% of the bank’s shares after its £46bn state bailout at the height of the 2008 financial crisis.
The bank also boosted its bonus pool by 37% to £195m, a figure that is likely to grow further before payments are made to bankers in the spring.
But while shareholders and bankers are in line for payouts, the chief executive, Alison Rose, said some of the bank’s most vulnerable customers were struggling amid a 9.4% rise in inflation.
While most customers were having to spend about 20-30% more on “critical items” such as utilities and fuel, those on the lowest incomes were falling into fuel poverty, defined as spending more than 10% of their income on energy bills.
However, Rose said it was not resulting in defaults on loans or mortgages, which have been affected by interest rate rises meant to curb inflation, because nine out of every 10 customers were on fixed rates. She said the bank was “not currently seeing any immediate signs of distress”.
She added: “What we’re seeing is a squeeze on disposable income. We’re not seeing a credit event. We’re seeing a potentially lower growth event as people are having to manage lower disposable income and different challenges.”
However, Rose said executives were aware “that the most significant challenges are yet to come”.
But the outlook did not result in a rise in provisions linked to potential defaults. Instead, the bank released £18m that had originally been put aside to deal with potential defaults. That was despite “uncertainty” over economic forecasts, including the path of inflation. The lender was expected to put aside £145m in impairment charges, according to consensus estimates.
Updated forecasts showed that the bank had downgraded its expectations for the UK economy, which is now expected to grow 1.1% on average over the next five years compared with its previous forecasts of 1.7%. That includes forecasts for 3.5% growth this year, falling to 0.8% in 2023.
Its central scenario also assumes an increase in unemployment to pre-pandemic levels, and an eventual decline in inflation in the latter half of next year. NatWest also said it was forecasting a further rise in interest rates to 2%, as the Bank of England attempts to control rising prices, and a “gradual cooling” of the housing market.
While the bank reported a 13% increase in profits for the first half of the year, thanks in part to a strong performance in the first quarter, NatWest revealed a dip in profits between April and June, which fell 5% to £1.4bn, down from £1.5bn a year earlier. However, that was better than the £940m that analysts had expected, according to consensus estimates.
The figures exclude the financial impact of Ulster Bank in Ireland, which is in the process of having its loan books sold as NatWest winds down the business.
Legal costs – the source of which were not specified – partly offset the bank’s income from loans and mortgages. Its net interest margin, which measures the difference between what it earns from loans and pays for deposits, rose to 2.72%, up from 2.35% a year earlier.
The bank said it expected a further rise in net interest margins, and said impairment charges, which include money put aside for potential defaults, to stay low.
NatWest shares rose as much as 8% in morning trading.
“In a mixed UK bank reporting season so far, there’s no question who is getting the gold star,” said Russ Mould, the investment director at AJ Bell.
“Natwest has knocked it out of the park with its latest results. It’s hard to see what more it could have done to impress the market. Profit ahead of expectations: check. Big shareholder returns: check. Raised guidance: check. It all adds up to suggest that rising rates are helping to boost the profitability of the group.”