NatWest Group Plc’s shares plummeted after it cut its margin guidance, the latest UK lender to warn higher interest rates are stirring competition for deposits.
The bank reported a net interest margin of 2.94%, compared with 2.99% a year ago, and said the full-year figure was set to be above 3%, down from its previous expectations.
NatWest executives pointed to customers shifting into fixed-term accounts to take advantage of better rates, which means the bank spends more on interest payments, as well as the potential end of Bank of England rate hikes that have buoyed earnings on deposits for the past two years.
“This is a material downgrade to consensus earnings expectations,” Barclays analysts wrote in a note.
Its shares were trading 9.23% lower at the time of publication, having fallen as much as 18.2%. The UK government remains NatWest’s biggest shareholder following a bailout during the financial crisis.
Chief Financial Officer Katie Murray told reporters the trend toward fixed-term accounts was “beginning to slow down a little bit,” and the bank is set to end the year with 17% of its deposits in fixed-term accounts, compared to 15% currently. This type of product was a tiny slice of banking business when interest rates were at rock-bottom.
The UK’s biggest corporate lender reported operating pretax profit of £1.3 billion ($1.6 billion) for the third quarter, a rise of more than 22% on a year ago, but slightly below analyst expectations.
“Credit losses and impairments remain low and we are ready and able to stand by our customers and businesses through the current economic uncertainty,” Paul Thwaite, interim chief executive officer, said in a statement.
Thwaite took the helm in July after his predecessor Alison Rose stepped down over a row about former Brexit campaigner Nigel Farage’s account closure.
Separately, the bank released the initial findings of an investigation into its handling of the incident. That found “serious failings” in its treatment of the politician-turned-pundit.
NatWest said it would make a number of changes to its policies and procedures around exiting clients — which the Financial Conduct Authority is also now reviewing — and will disclose any decision on whether it would cut former CEO Rose’s pay as soon as possible.
NatWest’s earnings add to the signs that higher rates are shifting from a money-maker to a source of pressure for Britain’s lenders. Data published last week showed that inflation failed to slow as forecast in September, bolstering the case for the Bank of England to keep interest rates at their highest level in 15 years. The price of a mortgage has spiked, with banks passing on higher funding costs to borrowers who are rolling off fixed deals.
At the same time, banks are making more on their deposits with the central bank, leading to calls from politicians and regulators to pass more of this windfall to their customers.
Barclays Plc cut its guidance on Tuesday to reflect growing competition for deposits, while Lloyds Banking Group Plc on Wednesday stuck to its outlook for the year.
What Bloomberg Intelligence Says
Natwest’s downgraded full-year NIM guidance to above 3% from about 3.15%, similar to Barclays’ cut, shows intensifying pressure in the UK deposit market, with 2023 and 2024 consensus revenue set for downgrades. Lower loan-loss charges provide a relief that may not prove sustainable, with consensus baking in an over-40% rise in provisions for loan losses in 2024.
Tomasz Noetzel, BI analyst
--With assistance from Joe Easton.
(Updates to add latest share price, CFO comments from fifth paragraph.)
