Pre-tax profits at NatWest, the owner of Royal Bank of Scotland, remained flat at £1.1 billion during the third quarter of this year as higher bad debt provisions and the cost of exiting its Irish business weighed on rising income from higher interest rates.
Setting aside £247 million to cover an anticipated increase in the number of mortgage and credit customers defaulting on their debts – up from £26m at the end of June – the group also predicted that worsening economic conditions will trigger a 7 per cent decline in UK house prices next year. While overall mortgage lending remained strong, NatWest said there has been slowing demand for new mortgages in recent weeks.
The group, which is 48% owned by the UK Government, was also hit by a 652m (£563.2m) loss on its Ulster Bank business, which it is in the process of exiting. This was driven in part by a revaluation of the Irish bank’s mortgage book.
Total quarterly income rose to £3.2bn, up from £2.7bn in the same period a year earlier, as like its peers NatWest benefitted from rising interest rates. Higher borrowing costs increase the gap between the lower rates of interest that banks pay to savers and the higher rates they charge on mortgages, personal loans and credit cards.
NatWest was the last of the UK’s “Big Four” banks to report quarterly earnings this past week, with HSBC and Barclays posting strong increases in profits.
READ MORE: Shares slide in Royal Bank owner following cost-of-living warning
It was a different story on Thursday when the UK’s largest mortgage lender – Bank of Scotland owner Lloyds – forecast an 8% decline in UK house prices and increased its bad debt provisions.
As a result, it suffered a 26% decline in profits to £1.5bn during the three months to the end of September. Lloyds and NatWest both have a more dominant exposure than HSBC or Barclays to the UK economy.
In addition to the impact of worsening economic conditions, the banking sector has also been unsettled by the possibility of additional taxes. Chancellor Jeremy Hunt is said to be considering putting a surcharge on bank profits as he and new Prime Minister Rishi Sunak seek to plug an estimated £30bn to £40bn gap in the UK’s finances.
“Today’s quarter three numbers [from NatWest] are a reminder if any were needed of how vulnerable banks are to the economic winds blowing through the economy,” CMC Markets analyst Michael Hewson said.
NatWest said it has not yet seen any decline in house prices. Though there has been plenty of activity among customers refinancing their mortgages, there has been a decrease in customers trying to get new mortgages in recent weeks.
READ MORE: Profits down as UK’s largest mortgage lender prepares for falling house prices
Chief executive Alison Rose said the group's credit card data indicates that many are now “proactively managing their finances” in response to spiralling inflation and the economic downturn. This has included actions such as consolidation of credit card debts, a shift in supermarket spending, and more detailed management of subscription services.
“The cost of living is clearly squeezing disposable incomes,” she said. “We are seeing for the lowest decile income households that more of their disposable income is being spent on food and utilities.”
She added that the group’s capital and liquidity levels “mean we are able to help those who are likely to need it the most”.
“Although we are not yet seeing signs of heightened financial distress, we are very conscious of the growing concerns of our customers and we are closely monitoring any changes to their finances and behaviours,” she said.
State-backed NatWest returned to majority private ownership earlier this year more than a decade after the Government shelled out £45bn to save the business from going under during the global financial crisis.
Earlier this month it announced the closure of an additional 43 bank branches across the UK as part of continuing cost savings efforts.
Shares in NatWest closed yesterday’s trading 22.8p lower at 224.9p, a decline of more than 9%.
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