NatWest Earnings: Guidance Enhanced On Strong Net Interest Margin and Loan-Loss Performance

NatWest reported a strong second quarter, ahead of company-compiled consensus estimates. Total income grew 5% to GBP 3,590 million compared with last quarter and good performances across the board. Standing out positively was an expanding net interest margin, which widened to 210 basis points from 205 basis points last quarter. We had expected a further decline in the margin between what the bank receives from borrowers and pays to its depositors. The lending margin did indeed decline by 2 basis points, but deposit margins expanded by 6 basis points. This was helped by solid deposit growth of about 1% and an improving deposit mix shift dynamic. The structural hedge income locked in on July 27 until 2026 already marginally exceeds 2023 hedge income with the optionality for more. Loan losses also stood out positively, as was expected after an already good quarter posted by Lloyds driven by improving economic scenarios. NatWest booked a GBP 45 million loan-loss reversal after updating its economic outlook and releasing GBP 117 million in management overlays. Guidance was improved to about GBP 14 billion in total income (GBP 13 billion-GBP 13.5 billion previously) and loan losses below 15 basis points (below 20 basis points previously). The new guidance is aligned with our forecasts and as such we aren't changing our GBX 360 per-share fair value estimate. Our no moat rating is unchanged.