NatWest shares fall as net interest margin guidance disappoints

NatWest Group PLC's shares fell more than 9% on Feb. 17 after the U.K. bank said its net interest margin for the coming year was unlikely to surpass the level hit in the fourth quarter of 2022.

The bank issued guidance for net interest margin — the difference between interest it receives and pays out, relative to assets — of about 3.20% for full year 2023. This is the same level the bank achieved in the fourth quarter of 2022 on the back of higher central bank interest rates.

That benefit to the bank will diminish over the course of 2023, however, as higher rates are increasingly passed on to customers. NatWest's pass-through rate, also known as the deposit beta, rose from about 25% to about 35% in the fourth quarter, and it could increase further to about 50%, executives said on an earnings call.

"We've probably hit the end of the huge increases in NIM that we've all got very comfortable with over this last year," said CFO Katie Murray. "It's going to be much more muted as we move forward."

The guidance assumes the Bank of England base rate remains at 4.0% through 2023 before starting to fall in mid-2024. Given the lagging effects of rate hikes, the guidance suggests NIM could continue to rise in the early part of 2023 before dropping later in the year.

The deposit beta will be managed based on the bank's liquidity and funding needs, as well as competitive dynamics, CEO Alison Rose said.

Customer behavior will be a key factor in the progression of margins, said Rose. NatWest has seen consumers take a more hands-on approach to their finances against a challenging economic environment and move to fixed-term products with higher rates.

"The uncertainty in all of this is customer behavior, and we continue to monitor that very closely," Rose said.

NatWest is "very comfortable" with its ability to compete in the market and is a net gainer of new accounts, Rose said. "On deposits, we'll manage volume and value, and we'll keep it broadly stable," she said.

The bank's return on tangible equity improved to 12.3% in 2022 from 9.4% the year prior, and it maintained its goal for a 14%-16% ROTE over the medium term. NatWest kept the target as it wants to give a clear view on sustainable returns "without huge peaks and troughs," Rose said.

The lender proposed a 10-pence-per-share final dividend and announced an £800 million share buyback program, taking total 2022 distributions to £5.1 billion. Analysts expect U.K. banks to return more capital to shareholders on the back of strong 2022 earnings, S&P Global Market Intelligence previously reported.

NatWest's shares pared some of the early losses and were trading 5.8% lower in late morning in London.