NatWest profit leaps but rising prices bite

British taxpayer-backed bank NatWest reported a leap in annual profit on Friday on the back of the country’s economic recovery, but said rising prices would make it harder to cut overheads, lowering its cost-cutting target.

NatWest reported statutory pre-tax profits of 4 billion pounds ($5.45 billion) for the 2021 calendar year, in line with an average of analyst estimates compiled by the bank. The previous year the bank had made a 351 million pound loss.

The bank announced it would pay a 7.5 pence per share dividend and an on-market share buyback of 750 million pounds.

Like their European peers, British banks have benefitted from a rebound in spending by consumers, lower than expected loan defaults, and a buoyant housing market since the initial phase of the pandemic.

The improved picture meant NatWest could release 1.3 billion pounds of its reserves built up to deal with soured loans.

However, analysts warn inflation at near 30-year highs threatens to squeeze household incomes and dampen the recovery.

“We are acutely aware of the challenges that many people, families and businesses continue to face up and down the country and are working alongside our customers to provide the support they need,” said NatWest Chief Executive Alison Rose.

NatWest reduced its annual cost-cutting target to 3% from 4% for each of the next two years, citing inflation pressures and reinvestment. But it did hit its 4% cost-cutting target for 2021.

Two interest rate hikes in quick succession by the Bank of England have improved the outlook for banks – as they make money on the difference between rates charged on lending and paid out on deposits — with further rises expected this year.

The bank said it expected its income to grow to 11 billion pounds this year, up from 10.5 billion in 2021.

NatWest — renamed from Royal Bank of Scotland by Rose — is close to ending a 14-year run as a majority state-owned bank. A string of stock sales by the government has reduced its holding to 51%, with further sales expected within months.

However, NatWest did not escape 2021 without setbacks. The lender’s profits were dented by 466 million pounds of litigation and conduct charges, including a 265 million pound fine for failing to prevent the laundering of 365 million pounds, some of it deposited at a branch in bin bags.

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