City forecast: Interest rate hikes set to boost RBS owner NatWest

Rising interest rates are likely to see Royal Bank of Scotland (RBS) owner NatWest provide a positive update for investors this week when analysts are also expecting it to confirm that it saw a strong swing into profit last year.

The lender, which also owns Ulster Bank among other financial services brands, made a £3.6 billion pre-tax profit in the first nine months of 2021 so anything less than a massive improvement from the £351 million loss it made in 2020 will be very unexpected.

Analysts forecast that pre-tax operating profit will reach just above £4bn, including a £438m profit over the last three months of the year.

It would be the worst quarter of the year "although that is relatively normal for banks as they tend to clean up and clear out their books in the final three-month period", said AJ Bell financial analyst Danni Hewson.

RBS owner NatWest is expected to confirm a strong recovery in profits during 2021 when it reports full-year figures on Friday.

The results come amid rising interest rates around the world. Earlier this month, the Bank of England upped its base rate for the second time in fewer than two months.

"Interest rate hikes are bad news for most businesses, but not banks," said Sophie Lund-Yates, an analyst at Hargreaves Lansdown.

"Since they make money on what they can charge customers versus the rate they receive on deposits, the benefits will soon start to stack up. We're therefore expecting a reasonably spritely tone from NatWest Group."

It has been a good year to be a NatWest shareholder. In the last 12 months, shares have soared 44 per cent, much higher than the 17 per cent that the FTSE 100 has seen overall, Ms Hewson pointed out.

Shareholders might be hopeful that NatWest can repeat their performance from the last quarter when profits were around £400m higher than experts had predicted.

But a large part of this was due to the release of £242m that the bank had set aside into a rainy day fund to cover loans that might have gone bad during the Covid-19 crisis.

Buoyed

"Operating profits in the first nine months of the financial year were buoyed by the release of £949m, which had been put aside in case people defaulted on their loans during the worst of the pandemic," Ms Lund-Yates said. "This time around, this helpful tailwind won't be blowing as strongly, so we'll be keenly focused on the underlying profit figure.

"Finally, it will be the outlook statement we're interested in. Rising inflation has tended to dent consumer confidence as household incomes don't go as far. That could lead to a reduction in customers spending on credit, which then affects banks."

Michael Hewson, chief market analyst at CMC Markets UK, said shareholders will be looking for management to follow through on the pledge to distribute a minimum of £1bn per annum to shareholders from 2021 to 2023 via a combination of ordinary and special dividends, which will also be good news for the UK government, whose stake now sits at just under 53 per cent.

NatWest has also put aside £294m to cover a fine it was expecting for money laundering. The fine was finally set at £264m.

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