At the time of writing, the NatWest (LSE: NWG) share price is down 8.9% for the day. Investors looking for a reason for the decline need to look no further than the company’s third-quarter 2022 report, which was released this morning.
What a difference three months make. On 29 July 2022, NatWest released its half-year results, and the FTSE 100 member’s share price moved about 8%: but it went up, not down. As always, July’s interim results started with a commentary from the group’s chief executive. The opening paragraph began with “NatWest Group delivered a strong performance…“. The second paragraph opened with, “We know that continued increases in the cost of living are impacting people, families and businesses…“.
Today’s commentary started like this: “In a challenging environment, NatWest Group continues to deliver a strong financial performance”. The second paragraph began with, “At a time of increased economic uncertainty, we are acutely aware of the challenges that people, families and businesses are facing…“.
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Gains and losses
The tone of this quarter’s results is noticeably gloomier. It is difficult to read the good news in the report without immediately encountering the bad bits. The bank’s pre-tax operating profits of $1.1bn are some 20% higher than for the same period last year. But, they fell short of the $1.2bn analysts were expecting.
This quarter’s net interest margin–the difference between what NatWest lends and borrows at–of 2.72% was 26 basis points higher than in the first quarter of this year. But, other operating expenses were 1.8% higher in the year to date.
The £247m impairment charge that hit this quarter’s income statement has drawn much attention. This charge estimates future losses from defaults and missed payments on loans the bank has made. Last year it was not a charge but a gain for the same period. There can be no doubt that NatWest management is expecting more challenging times.
And those times are seen to be tougher than analysts expected with their estimated charge of £173m. The difference between the bank and analyst estimates goes a long way to explaining why the bank missed the pre-tax profit estimate.
NatWest share price fall
Investors must have known about the UK’s cost-of-living crisis ahead of the report. They must have been aware of the potential for NatWest customers to default or miss payments on loans due to that and the rise in interest rates. NatWest’s interim report was full of references to this potential issue. But it would seem that this quarter’s report has suggested to investors that the bank is now expecting to run into problems. NatWest said it is “…not yet seeing signs of heightened financial distress…” from its customers. But, surely it expects it, given the size of that loan loss provision.
That’s probably why the NatWest share price has fallen: Investors expect material impacts on the bank’s performance in the coming quarters. If that comes to pass, then some solace might be found in the idea that a windfall tax on banks’ profits — an option that Rishi Sunak has said is still on the table — is less likely if those profits are being eaten away by such things as loan loss provisions in a period of tougher economic times for lenders.
