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NatWest swings to loss as it adds £2bn for Covid bad loans

By Frank Prenesti

Date: Friday 31 Jul 2020

(Sharecast News) - NatWest first-half profits evaporated as the bank was forced to set aside an extra £2bn for bad loans in the second quarter due to the Covid-19 pandemic.
The impairment loss is up from £802m in the first quarter. NatWest, formerly Royal Bank of Scotland, reported a £770m pre-tax loss compared with a £2.7bn profit a year ago.

It guided for a full-year impairment charge in the range of £3.5bn - £4.5bn. The bank joined rivals Barclays and Lloyds, which earlier this week set aside huge provisions for potential loan losses against a worsening economic outlook in recent months.

NatWest said impairment charges in the second half of 2020 would be driven by a combination of the developing economic outlook for the UK and Republic of Ireland, along with the effectiveness of government support schemes in delaying and "reducing the level of economic distress...and the absolute level of defaults across lending portfolios".

Income at the bank, still 62%-owned by the taxpayer after its bailout in the 2008 financial crisis, fell 3.75% to £3.8bn in the first half. NatWest made a profit of £2bn before impairment charges.

Second quarter income was flat at £1.9bn and the bank made a pre-tax loss of £1.2bn in the three month period. Analysts had been expecting second quarter income of £2.4bn and a loss of £318m.

The banks common equity Tier 1 ratio - its capital cushion and a measure of its balance sheet strength - increased to 17.2%, from a previous 16.2% - one of the highest in the sector and underpinned by a strong liquidity position, with a pool of £243bn and excess ratio of 166%. NatWest said it still expected to hit cost savings of £250m.

"Our performance in the first half of the year has been significantly impacted by the challenges and uncertainty our economy continues to face as a result of Covid-19," chief executive Alison Rose said in a statement.

"However, NatWest Group has a robust capital position, underpinned by a resilient, capital generative and well diversified business."

Interactive Investor head of markets Richard Hunter said the "parlous outlook for the banks amid this economic uncertainty has been largely factored in by investors, with the NatWest share price having declined 52% over the last year, as compared to a drop of 21% for the wider FTSE100".

"The question therefore remains as to where the banks can reasonably get to from here, and whether prospects will continue to be dominated by factors beyond their control. NatWest seems increasingly well positioned to benefit from any incremental improvements in the economy, with this being reflected in the market consensus of shares optimistically remaining at a buy."

Hargreaves Lansdown equity analyst Nicholas Hyett said NatWest's lending to businesses had increased dramatically year-on-year as companies sourced emergency funding during the lockdown.

"Stressed businesses aren't ideal borrowers for a bank, and while much of the new lending is underwritten by the UK government, the bleaker economic picture has led NatWest to dramatically increase its provision for future defaults," he said

"The longer term challenge faced by all UK banks is how to make money when super low interest rates increasingly look like they're here to stay. Even before impairment charges NatWest's operating profits were down 60%. We're not sure NatWest has an answer to that, especially since it's shrinking investment bank means interest income is getting ever more important for the business."

"NatWest is by far the best capitalised big bank in the UK, but with clear growth options few and far between and dividends or buybacks off the table for now, we're not sure the group's able to make the best use of its position of strength."

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