City commentators are wondering how competitive the mortgage arm can be in times of inflation and high interest rates
NatWest Group PLC (LSE:NWG) is heading for a difficult 2022 as higher living costs could impact its mortgage business.
The UK-focused bank posted a quarterly operating profit of £563mln in the retail banking arm, supported by a strong performance in mortgages and improved customer spending and demand for new lending.
READ: Natwest disappoints market with lacklustre update
Across the UK and RBSI retail and commercial businesses, net lending excluding UK Government support schemes increased by £2.9bn, including £2.5bn related to mortgage growth, with year-to-date annualised growth of 3.1%.
However, the net interest margin in the quarter to end-September was 1.54% compared to 1.61% last year, due to the non-repeat of the tax variable lease repricing gain in the second quarter in its commercial banking arm.
“This situation puts pressure on the bank to start charging more for its lending products and it has wasted no time in doing so, lifting its fixed-rate mortgage deals immediately after the Budget earlier this week. In fact, the bank has been making changes to rates for the past few months as well as making some of its mortgage-related cashback deals less generous,” commented AJ Bell investment director Russ Mould.
“There is a difficult balancing act as the mortgage market has been incredibly competitive during a period of incredibly low-interest rates and NatWest will have to make sure it doesn’t increase its rates to the extent that borrowers can find better deals elsewhere.”
The outlook for higher rates may suit NatWest and its banking peers, but consumers are under pressure from living costs.
“Higher mortgage costs for those on variable rate deals, and more expensive mortgages for new deals, add to financial pressures including a sharp rise in energy bills and greater cost of buying food,” Mould continued.
“Greater borrowing costs will also weigh on companies just at a time when so many businesses still have considerable pandemic-related debts to pay off. Therefore, NatWest is not going to see an easy ride as we move into 2022.”
Nonetheless, chief executive Alison Rose remained bullish about the economy, highlighting that some key indicators are positive: “growth is good, unemployment is low and there are limited signs of default across our book”.
“We have a vital role to play in helping the 19mln people, families and businesses we serve in communities throughout the UK to thrive,” she said in the results.
The stock was the top faller in the FTSE 100 on Friday afternoon, down 5% to 219.95p.
Shares have climbed 39% in the year to date but are still 1% below pre-pandemic levels.
Read More: NatWest Group plc heading for tricky 2022 as living costs rise