NatWest has benefited from the rise in borrowing costs triggered by the war in Iran, posting a 12.2 percent rise in first-quarter pre-tax profit to £2 billion and raising its revenue forecast for the year – the latest sign that Britain’s biggest lenders are reaping the rewards of a market that no longer expects the Bank of England to cut interest rates further.
The FTSE 100 bank significantly exceeded the £1.9bn forecast by City analysts. Results published on Friday showed total revenue rose 9.5 per cent year-on-year to just under £4.4bn. What is crucial for shareholders is that the net interest margin, i.e. the difference between what the bank charges for loans and what it pays out for deposits, increased from 2.27 percent in the previous year to 2.47 percent.
Buoyed by the stronger quarter, NatWest told investors it now expects full-year profit (excluding one-off items) to come in at the “high end” of its previously forecast range of £17.2 billion to £17.6 billion, citing “our latest expectations on interest rates and economic conditions.”
The figures complete a hat-trick of top updates from the UK high street giants and follow similarly strong figures from Lloyds Banking Group and Barclays earlier in the week. Together they underline how the regime of higher, prolonged interest rates, reintroduced by the energy price shock following the outbreak of war on February 28, has transformed the economics of British private and commercial banking, at least in the short term.
Paul Thwaite, NatWest’s chief executive, was keen to play down any suggestion that the bank was simply riding a geopolitical wave. “These are good numbers, but the numbers are based on doing things for customers,” he said, pointing out that deposits rose 2.5 percent year-on-year to 445.5 billion pounds and net lending rose 6.6 percent to 396.4 billion pounds.
But for the millions of households and small businesses on the receiving end, the numbers are a more unpleasant story. As inflation expectations rise, swap rates, the wholesale benchmarks that lenders use to price fixed-rate mortgages, have risen sharply. According to data provider Moneyfacts, the average two-year permanent housing contract was 4.83 percent before the conflict, but has since risen to 5.78 percent. The Bank of England this week left its key interest rate at 3.75 percent but warned that borrowing costs may have to rise “significantly” if price pressures continue.
Of course, higher interest rates work both ways. They flatter margins, but also put the loan portfolio to the test. NatWest set aside a £140m charge to reflect the likely strain on the economy from the war and increased its quarterly allowance for expected credit losses to £283m, up from £189m in the same period last year. The bank currently forecasts the UK’s economic growth will be just 0.4 percent this year and unemployment will reach 5.7 percent.
Thwaite was candid about the limitations of prediction in the current climate. “None of us knows exactly how things will play out over 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 chief financial officer, said the lender had “seen no significant changes in customer behavior or signs of stress” – a cautious but targeted reassurance for investors aware that today’s higher margins could quickly be eroded as SME borrowers and mortgage holders buckle under the weight of more expensive debt.
For Britain’s small and medium-sized businesses, already struggling with tighter credit conditions and weaker demand, the outcome is sobering: banks may benefit from the new interest rate environment, but the cost of capital for the rest of the economy is moving in only one direction.
