NatWest Q1 profit hits £2bn as Iran war pushes up UK housing rates

NatWest cashed in on rising borrowing costs caused by the Iran war, posting a 12.2 percent jump in first-quarter pre-tax profit to £2 billion and raising its full-year profit guidance, 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 rates further.

The FTSE 100 bank comfortably beat the £1.9 billion forecast by City analysts, with results published on Friday showing revenue up 9.5 per cent year-on-year to £4.4 billion. Most importantly for shareholders, the net interest margin, the gap between the amount a bank charges on loans and pays on deposits, grew to 2.47 percent from 2.27 percent a year ago.

Buoyed by a strong quarter, NatWest told investors it now expects full-year revenue, in a single results release, to be at the “high end” of its previous guidance range of £17.2 billion to £17.6 billion, citing our “recent expectations for interest rates and economic conditions”.

The numbers complete a hat-trick of bumper updates from Britain’s high street lenders, following similar strong figures from Lloyds Banking Group and Barclays earlier in the week. Together they emphasize how the regime of long-term high rates, re-imposed by the energy price shock following the outbreak of war on February 28, has transformed the UK’s retail and commercial banking economy, at least in the short term.

Paul Thwaite, chief executive of NatWest, was at pains to play down any suggestion that the bank was merely riding the political wave. “It’s a good set of numbers but the numbers are driven by doing things for customers,” he said, pointing to deposits rising 2.5 per cent year-on-year to £445.5 billion and total lending up 6.6 per cent to £396.4 billion.

However, for millions of households and small businesses, the numbers tell a much darker story. With rising inflation expectations, exchange rates, the wholesale benchmarks that lenders use to price fixed-rate mortgages, have risen sharply. The two-year fixed-rate deal stood at 4.83 percent before the crash, according to data provider Moneyfacts, but has since risen to 5.78 percent. The Bank of England kept its base rate at 3.75 percent this week but warned that borrowing costs may need to rise “significantly” if price pressures persist.

High prices, of course, cut both ways. They flatter the margins, but they also check the loan book. NatWest has set aside £140 million to reflect the war’s toll on the economy, taking its quarterly loss on expected credit losses to £283 million, up from £189 million in the same period last year. The bank now projects the UK economy will grow by 0.4 per cent this year, with unemployment rising to 5.7 per cent.

Thwaite was blunt about the limitations of predicting the current climate. “None of us know exactly how it will go during the whole year; a lot will depend on the timing of the energy shock,” he said.

For now, however, NatWest’s books are on hold. Katie Murray, the bank’s chief financial officer, said that the lender “has not seen any significant changes in customer behavior or signs of distress”, a cautious but clear assurance for investors who remember that today’s fat margins can be quickly wiped out if SME borrowers and home owners begin to borrow under the weight of attractive loans.

For Britain’s small and medium-sized businesses, which are already navigating tight credit conditions and weak demand, the reading from the other side is sad: banks may be successful in the new pricing environment, but the cost of capital across the economy is only going in one direction.