Expectations are set pretty high for the UK banks heading into their latest reporting season and this helps explain why, despite a return to profit and otherwise pretty positive update, Natwest got us off to a subdued start in terms of its share price.
“After all the banking sector is one of the few industries which will be waving flags and cheering as interest rates are increased as it allows them to generate a higher return from their lending activities,” said AJ Bell’s Russ Mould.
“The better than expected earnings and hike in the outlook were, to some extent, baked in, and investors may be concerned about the possibility of an increase in bad debts as its customers face a cost of living crisis. This could outweigh any boost to profitability from higher rates.
“Natwest seems relaxed on this score and has actually reduced its guidance on impairments – whether that view will be tested in 2022 remains to be seen.
“If it holds, then Natwest should be in a position to dole out more generous shareholder returns, which is a key attraction of investing in the sector. It should also enable it to further reduce the Government’s stake by buying shares.
“Natwest has slipped a little bit behind target on cost reduction, thanks to higher inflation, which may be adding to some investor nervousness and the company is yet to see any progress on that key measure of profitability – net interest margin.”