Pre-tax profits at NatWest Group remained flat between July and September at £1.1bn, amid a worsening economic outlook and a cost of living squeeze on its customers, as the bank predicted UK house prices would fall by 7% next year.
Its profits, boosted by higher interest rates increasing its margin between what it charged for loans and paid out to savers, were slightly higher than the £1bn made in the same period a year earlier but lower than analysts’ forecasts.
The lender, which is still 48% owned by the government, also took a £242m provision for potential defaults in the three months to 30 September, which it said reflected increased economic uncertainty, and mirrored the amount released by the bank a year earlier.
Shares in NatWest tumbled by as much as 8% during morning trading on Friday, making it the biggest faller on London’s FTSE 100, on its higher loan loss provisions and lower-than-expected profits.
NatWest said defaults remained low, although it expected them to increase over the next year. It said it was not yet seeing signs of heightened financial distress among its customers but added that some had already changed their behaviour to manage their spending, including changing the supermarket they shop at or by consolidating their debts.
“The cost of living is clearly squeezing disposable income, we are seeing for the lowest decile income households that more of their disposable income is being spent on food and utilities,” said NatWest’s chief executive, Alison Rose.
Spending on travel and hospitality has continued, as seen in NatWest’s debit and credit card data, Rose said, while many customers have a financial “buffer” after the coronavirus pandemic.
However, many are already “proactively managing their finances and their balance sheets” amid higher inflation and higher cost of living and in preparation for an economic downturn.
“Consolidating credit card debt, being more responsible around how they manage that. We have seen people on lower decile incomes balancing where they spend their money, maybe changing which supermarket they spend in, managing their subscriptions in a different way,” Rose said.
The bank now expects house prices to fall by a little more than 7% in 2023, based on the weighted average of its forecasts. On Thursday, the UK’s largest mortgage lender, Lloyds Banking Group, predicted an 8% slide in house prices next year.
NatWest said it had not yet seen any house price falls, and while there had been a lot of activity among customers refinancing their mortgages, there had been some slowdowns in customers trying to get new mortgages in recent weeks.
The bank said it had continued to offer mortgage deals during the market turmoil after the ill-fated mini-budget by Liz Truss and Kwasi Kwarteng, which resulted in as many as 1,000 packages being pulled by lenders, leaving many borrowers unable to secure loans or being hit by withdrawn mortgage offers.
NatWest said it had lengthened its early refinancing window by two months to six months, to allow some of its eligible mortgage customers to refinance earlier, saving them about 2% on their next mortgage rate at a time when interest rates were on the rise.
This was among the series of steps the lender said it had taken to help consumers and businesses deal with a worsening economic picture.
The outlook had changed since the summer, NatWest said, and it had revised down its forecasts for the UK economy. While it now expected its profits to be supported by higher interest rates, NatWest said it no longer expected its costs to remain stable as a result of increased inflationary pressures.
NatWest is the last of the large UK banks to report its quarterly results, after strong profits at HSBC and Barclays on the back of higher interest rates.
The lenders’ results reignited calls for an excess profits tax on UK banks, as the Liberal Democrats led the calls for a windfall tax on the sector, at a time when the chancellor, Jeremy Hunt, and the new prime minister, Rishi Sunak, are looking at ways to plug a £40bn hole in the public finances.