NatWest's Q3 profit rises 30%, upgrades guidance

NatWest reported a 30% increase in third-quarter pretax operating profit to 2.2 billion pounds, surpassing analyst expectations, and subsequently raised its full-year return on tangible equity target to above 18% from 16.5%. This robust performance was attributed to broad-based loan growth, expansion in its wealth management business, and crucially, avoiding the substantial car finance mis-selling charges that impacted rivals like Lloyds. NatWest shares rose 5.5% following the announcement, though the bank faces potential future tax hikes from an upcoming UK budget.

Analysis

NatWest reported a robust Q3 2023 pretax operating profit of £2.2 billion, a 30% year-over-year increase, significantly surpassing analyst expectations of £1.8 billion. This strong performance led to an upgrade in its full-year Return on Tangible Equity (ROTE) target to above 18% from the previous guidance of over 16.5%. The bank's shares reacted positively, rising 5.5% in early trading against a flat FTSE index.

The profit surge was driven by broad-based loan growth across mortgages and business lending, alongside an 8.1% increase in wealth management assets under management and administration to £56 billion. Crucially, NatWest avoided the substantial car finance mis-selling charges that negatively impacted rivals like Lloyds, highlighting a key differentiator in its near-term fortunes. The upgraded ROTE figure is notably the highest among British banks and one of Europe's highest, underscoring strong underlying business fundamentals.

Despite the strong operational performance and its recent return to full private ownership, NatWest faces potential headwinds from an upcoming UK budget. Industry executives fear Finance Minister Rachel Reeves might introduce tax hikes on banks in November to address public finances. This fiscal policy uncertainty could temper the otherwise optimistic outlook for the banking sector, which has benefited from higher interest rates and low default rates.

Key Decisions for Investors

• Investors should note NatWest's upgraded ROTE target and significant Q3 profit beat, driven by loan growth and wealth management, as indicators of strong operational momentum and effective risk management.
• Monitor the impending UK budget for potential tax policy changes affecting the banking sector, as new levies could temper future earnings despite current robust performance.
• Assess NatWest's valuation relative to its peers, considering its superior ROTE and insulation from specific sector-wide liabilities, while acknowledging broader macroeconomic and regulatory risks.