NatWest Group PLC (LSE:NWG) released £605mln of money set aside for bad debts paving the way for a share buyback of up to £750mln and an interim dividend of 3p.
The state-owned lender said in its interim results that loan repayment defaults remain low and the outlook has improved.
Operating profit before tax of £2.50bn in the first half of 2021 represented a sharp turnaround from an operating loss of £770mln in the same period of 2020.
NatWest Group Q221 Earnings:
Pretax Profit: GBP1.56B (est GBP702M)
Total Income: GBP2.66B (est GBP2.65B)
Operating Expenses: GBP1.71B (est GBP1.85B)
Net Interest Margin: 1.61% (est 1.62%)
Aims TO Distribute Minimum Of GBP1B/Year From 2021-23
— LiveSquawk (@LiveSquawk) July 30, 2021
Having released £102mln of provisions for bad debts in the first quarter, NatWest released another £605mln in the second quarter, taking the first-half total to £707mln. The bank said it expects the 2021 full year impairment loss to be a net release.
The CET1 ratio, which is a measurement of balance sheet strength, was in line with the first quarter at 18.2%.
The bank net interest margin (NIM) of 1.61% decreased by 3 basis points (1oo basis points equals one percentage point) compared with the first quarter, largely as a result of increased levels of liquidity. The NIM is essentially a measurement of the money a bank makes from lending out money that has been deposited with the bank.
Net lending increased by £2.2bn in the first half of 2021 to £362.7bn. Across the UK and RBSI (Royal Bank of Scotland International) retail and commercial businesses, net lending excluding UK Government support schemes, increased by £4.1bn, or 2.8% on an annualised basis, including £7.0bn of mortgage growth.
Customer deposits increased by £35.5bn to £467.2bn, as customers sought to retain liquidity and reduced spending, NatWest said.
The rollout of COVID-19 vaccines over the first half of 2021 has contributed towards an improved economic outlook, management said.
“The outlook remains subject to significant uncertainty and we will continue to refine our internal forecast as the economic position evolves,” it added.
Management said it is now aiming to distribute a minimum of £1bn per annum from 2021 to 2023, via a combination of ordinary and special dividends, and intends to commence an ordinary share buy-back programme of up to £750mln in the second half of the year.
"These results have been driven by good operating performances across the group, underpinned by a robust loan book and a strong capital position,” said Alison Rose, NatWest’s chief executive officer.
“While we see the potential for a more rapid recovery, we will continue to take an appropriate and conservative approach as the government schemes wind down and the economy reopens,” she added.
“We continue to make progress against our strategic targets and to accelerate our digital transformation as we build a bank that is relevant to our customers in every region of the UK and supports them at every stage of their lives. As the UK's leading business bank, we are determined to remove barriers to entry and help the economy build back better. Against the background of an ongoing pandemic, our commitment to helping people, families and businesses to rebuild and thrive has never been more important. Because if they thrive, so will we,” she declared.
Nicholas Hyett, an equity analyst at Hargreaves Lansdown, said there were some "headline-grabbing shareholder returns" in the announcement; however, "compared to rivals Lloyds and Barclays, the underlying trends are a bit weak".
"Mortgages have boosted loan growth, but more profitable unsecured lending looks a little sluggish. Despite progress on cost-cutting, the bank’s cost: income ratio also remains high compared to rivals. Put slow revenue growth and higher costs together and the underlying returns are a bit unexceptional. That’s not an insurmountable problem, but together with reducing the government’s remaining 55% stake they make for long to-do list,” Hyett said.
Richard Hunter, the head of markets at interactive investor, said NatWest appeared to be in rude health.
"Perhaps the most notable feature of the group at the moment is its financial health, where NatWest is faced with something of an embarrassment of riches. The ill-fated bravado leading up to the Great Financial Crisis is not just a distant memory but is also diametrically opposed to the conservative banking approach of today.
"A capital cushion of 18.2%, a liquidity cover ratio of 164% and access to a pool of liquidity amounting to £277 billion beg the question of the destination of the excess capital. A proposed dividend which implies a yield of around 1.5% could be supplemented by special dividends in the not too distant future, with a share buyback programme of up to £750 million also being announced. The bank is also likely to continue to target further purchases to trim the government stake, whose overall aim is to reduce the current level of 55% to around 40% over the next year," Hunter said.
"Overall, the numbers are generally ahead of expectations and represent a further step towards a more stable and conservative approach. The successes achieved so far have been reflected in a share price which has risen by 84% over the last year, as compared to a gain of 18% for the wider FTSE100, although the price still remains 11% down from the levels of two years ago. Nonetheless, the bank’s strength and standing continues to evolve, and the market consensus of the shares has also recently improved, now coming in at a buy,” Hunter concluded.
Shares in NatWest were down 0.4% at 204p in early deals, slightly outperforming thee FTSE 100 index.