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FTSE 100: NatWest clocks £1bn profit on rising interest rates and mortgage misery for millions

A man walks past ATM machines at branch of the NatWest bank in Manchester, Britain September 21, 2017. Picture taken September 21, 2017.    REUTERS/Phil Noble
NatWest said that it lent £11bn to new home buyers in the third quarter of the year. Photo: Phil Noble/Reuters

NatWest (NWG.L) posted pre-tax profits of just over £1bn ($1.15bn) for the third quarter, driven by rising interest rates, as it took a bigger-than-expected charge for bad loans.

The UK lender took a bigger provision for future loan losses, which it said reflected changes in its view of the economy, but its chief executive said the bank is seeing “no signs” of families in added financial distress.

Provisions for bad loans stood at £247m, in light of the worsening economic outlook. This compares to a £242m release of pandemic provisions in the same period last year and is far above analysts’ estimates of £173m.

Alison Rose, chief executive of NatWest, said: "Although we are not yet seeing signs of heightened financial distress, we are very conscious of the growing concerns of our customers and we are closely monitoring any changes to their finances or behaviours."

The pre-tax profit for the three months to September was slightly less than the £1.2bn forecast by analysts, and unchanged from last year.

Read more: FTSE 100: Lloyds profits slump as it braces for loan losses

The bank benefited from rising interest rates which pushed up income, just like Lloyds (LLOY.L), Barclays (BARC.L) and HSBC (HSBA.L) and most lenders across Europe.

However, NatWest said that it had passed on around 25% to 30% of the increased interest rates to savers since the last quarter of 2021.

NatWest shares plunged over 8% in early trading.

Total income came in at £3.2bn, a 16% increase from the same period in 2021 and in line with analyst forecasts.

NatWest, which is the UK's biggest corporate lender, has increased the amount of income it expects to make this year.

The lender expects to make £12.8bn in total income in 2022, up from its previous guidance of £12.5bn. The company made £10.4bn last year.

Rose added: “In a challenging environment, NatWest Group continues to deliver a strong financial performance; supporting our customers, responsibly growing our lending and making significant investments to transform the bank.”

The bank's retail arm lent £11bn in new mortgages in the three months to the end of September, nearly £3bn higher than this time last year and up 12% compared to the previous quarter.

The bank was also hit by a €652m (£562m/$650m) loss in its Ulster Bank business in Ireland, which it is in the process of exiting.

Read more: FTSE 100: Barclays posts £2bn profit

"The bank has felt the need to take a conservative approach to the possibility of bad debts, even though at present there is little sign of customer behaviour switching towards default," Richard Hunter, head of markets at Interactive Investor, said.

"At the same time, the underlying business excluding Ulster — the 'Go-forward Group' registered an increase in income of 37%, driven by the tailwinds of increasing interest rates as well as a significant increase of £9.9bn in lending, itself largely made possible by further strength in mortgage lending, despite recent headlines suggesting otherwise."

NatWest posted a third quarter attributable profit of £187m and a return on tangible equity of 2.9%, as well as a "robust balance sheet" with strong capital and liquidity levels.

"Elsewhere, the key metrics are in good shape. Net Interest Margin increased to 2.99% from 2.72% in the second quarter, and Net Interest Income jumped significantly to £7bn from £2.3bn," Hunter added.

"The capital cushion remains unchanged but comfortably robust at 14.3%, while the Liquidity Coverage Ratio is well ahead of the required level at 156%, even though the figure is marginally lower than the 159% of the previous quarter."

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