High-street bank NatWest Group (LON:NWG) raised its FY26 return on equity guidance after Q2 earnings narrowly beat expectations. The results were driven by higher fee and non-interest income on one hand and lower impairment losses on the other.
Narrow Q2 earnings beat
For the three months to June, the group posted total income of £4.5 billion compared with a consensus of £4.4 billion. Net interest income of £3.5 billion was in line with forecasts, while fee and non-interest income of £1 billion was 14% above forecasts.
Operating costs were marginally below forecasts at £2.07 billion, while impairments for credit losses were just £140 million against forecasts of £235 million. Therefore, Q2 pre-tax operating profit was £2.28 billion compared with the analyst consensus of £2 billion.
In retail banking, NatWest claims it grew its share in savings and investments with ISA sales up 20% in H1. It also lent £8.2 billion of mortgages to first-time buyers and is broadening its offer through platforms like Rightmove (LON:RMV).
Raised FY return target
The private banking and wealth management business took in £2 billion of net inflows, representing 9% growth. Meanwhile, the acquisition of Evelyn Partners added £71.7 billion of assets under management to the wealth management business.
For FY26, the bank is targeting total income of around £17.9 billion, slightly below the consensus of £18 billion. However, it raised its FY return on tangible equity target to greater than 19% against the consensus of 18.9%. It also said it would consider re-starting its share buyback programme from FY26, six months earlier than planned.
We are slightly bemused by the early strength in NatWest shares as frankly the Q2 beat is marginal. The underlying banking business was bang in line, and around half the beat came from lower provisions for bad loans.
Presumably investors are excited at the prospect of share buybacks restarting six months earlier than planned. And while it has nudged up its FY return target, we think there is still a lot of work to do.
Take the investment bank, NatWest Markets, for starters. The business soaks up capital like a sponge, with total assets of around £187 billion in June and risk-weighted assets of £22 billion. That implies a cost to the bank, and by extension shareholders, in terms of regulatory capital, yet the business barely makes money.
Total income in H1 was £792 million versus £762 million a year ago, or virtually unchanged despite soaring profits at other banks. Operating expenses were £752 million versus £667 million a year ago, even after a £20 million decrease in litigation and conduct costs.
That means profit was just £40 million, which is a ridiculously small return on capital employed. The only people benefiting from the business seem to be the ones working there, not the shareholders.
