By Scott Wright
SHARES in Royal Bank of Scotland owner NatWest Group dropped sharply yesterday as the institution cut its bank net interest margin and chief executive Alison Rose warned of the impact on business confidence from supply chain disruption and labour shortages.
The state-backed lender saw its share price tumble by 10.3p, or 4.4%, to 221.1p after reporting operating profits of £1.1 billion for the third quarter, around three times higher than at the same stage in 2020 and ahead of forecasts.
The results were boosted by the release of a further £242 million of provisions for bad loans arising from the pandemic, with Ms Rose declaring that the bank is “cautiously optimistic” over the outlook.
Analysts pointed to an underlying reduction of six basis points in the bank’s net interest margin to 2.24%, which was attributed to a tax variable lease re-pricing gain in the second quarter that was not repeated.
And they highlighted that the bank had booked litigation and conduct costs of £294m in the third quarter, which includes provisions for an anticipated fine in relation to breaches of UK money laundering regulations.
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Russ Mould, investment director at AJ Bell, said that with the prospect of an interest rate rise by the Bank of England “firmly in the headlights”, NatWest has “somewhat disappointed the market by announcing a reduction in its third -quarter net interest margin.”
Mr Mould said: “That’s been blamed on the non-repeat of the tax variable lease repricing gain in Q2 2021 in its commercial banking arm.
“This situation puts pressure on the bank to start charging more for its lending products and it has wasted no time in doing so, lifting its fixed-rate mortgage deals immediately after the Budget earlier this week. In fact, the bank has been making changes to rates for the past few months as well as making some of its mortgage-related cashback deals less generous.”
NatWest, which changed its name at corporate level from Royal Bank of Scotland last year, remains 54.7% owned by taxpayers following its £45.5bn bailout at the height of the financial crisis.
Commenting on the economic outlook, Ms Rose said loan defaults and unemployment were low, and consumer demand was strong, noting that credit and debit card spending had returned to pre-Covid levels. But she said supply chain disruption and labour shortages are now affecting business confidence.
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Speaking on a call with journalists, Ms Rose said UK businesses had been “incredibly resilient” through the pandemic. But she cautioned that “we are seeing… challenges on the supply chain” for small and medium-sized firms, which are related to the “speed of the economic recovery” and “how tightly supply chains have been wound down.”
Ms Rose said: “You are seeing disruption to the supply chain and that is definitely causing some impact. Costs are going up and you are seeing some inflationary pressure as a result of that… and over the last few weeks we are seeing that is affecting confidence from a business perspective.
“In particular, businesses talk to me about skills shortage and access to labour, so all of those elements are causing business confidence to drop a little, and as you know confidence is a really important thing for future investment.
“Having said that, we still remain cautiously optimistic about the economic recovery.”
On October 7, NatWest Group pleaded guilty to three breaches of money laundering regulations related to the accounts of a UK incorporated customer between November 7 2013 and June 23 2016, and between November 8 2012 and June 23 2016. It was alleged by the Financial Conduct Authority that around £365m was paid into the customer’s accounts.
Ms Rose said: “We deeply regret that the bank failed to adequately monitor and therefore prevent money laundering by one of our customers between 2012 and 2016.”
The bank is expected to be handed a heavy fine for the breaches later this year.
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