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A year ago loose talk about former client Nigel Farage sank chief executive Alison Rose’s career at NatWest. That was uncharacteristic of the UK retail bank’s understated style. Her successor Paul Thwaite has resumed normal service.
Confirmed as permanent chief executive on Friday, at the bank’s full-year results, there was no arm waving and overpromising on the outlook. Still, Thwaite would do well to shout a bit more about the bank’s successes.
Start with last year’s healthy performance. Return on tangible equity finished at nearly 18 per cent. That topped last year’s medium-term target range by two percentage points. This was in a year when banks such as NatWest had to pay more to keep depositors. NatWest’s cost of funding via deposits climbed at an average quarterly pace of 0.35 per cent.
Nevertheless its net interest margin, income minus funding costs, swelled by 31 basis points to 2.12 per cent. Even better, shareholder payouts — the regular dividends and share buybacks — rose almost 6 per cent to £3.6bn.
Perhaps that is why the shares surged 6 per cent on the day. It was not the revised ROTE target. It is now over 13 per cent, below the earlier range. Why so gloomy?
Thwaite will have one eye on its largest shareholder: the UK government, owner of 35 per cent. It plans a share sale this year. That creates an overhang that may give investors pause. Tactically, though, the new head might want to save the good news for nearer that time.
What weighs down NatWest, as with most banks in the region, is the steady inflation of risk-weighted assets. More RWAs require more capital buffer, which can weigh down ROTE and the valuation. That has slipped to 0.7 times tangible book value, from over parity a year ago.
Risk-weighted assets are rising, at £183bn last year, partly because of changes to regulatory requirements on risk weightings for loan assets perceived as potentially volatile. They should reach some £200bn by end-2025.
One way to get RWAs down can be through syndication, often via specialist alternative asset funds, known as significant risk transfer trades. NatWest plans more of these, which could help reduce this RWA inflation, and even reduce it. The Bank of England apparently approves of these so-called capital relief trades.
NatWest shows every sign of leaving its annus horribilis well behind. That is something the chief executive should shout about.
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