NatWest Reports Profits Above Expectations Despite Economic Challenges
NatWest has indicated that the economic consequences of the conflict in the Middle East could result in a £140 million cost, coinciding with slowing growth and increasing inflation, even as the bank reported profits exceeding expectations.
The FTSE 100 lender recorded a £283 million impairment charge, attributing nearly half of this amount to a reassessment of its economic forecast aimed at
"reflecting increased geopolitical risk and weaker equity markets".
Revised Economic Forecasts and Growth Projections
The bank now anticipates its base case for UK gross domestic product (GDP) growth to be 0.4% for the year, which is half the forecast recently issued by the International Monetary Fund (IMF) earlier this month.
NatWest reported a 12% year-on-year increase in operating profits, reaching £2 billion in the first quarter of the year, up from £1.8 billion in the same period last year. Analysts had predicted an average of £1.9 billion.
In its economic outlook, NatWest projects the UK unemployment rate to rise to 5.5% this year. The Office for National Statistics (ONS) reported a 4.9% unemployment rate in February but indicated an expected increase due to the ongoing conflict.
Inflation and Interest Rate Expectations
The bank anticipates that the impact of the Iran war will drive inflation to 3.5% in its base case scenario.
Despite this, NatWest expects the Bank of England to refrain from raising the base interest rate, which currently stands at 3.75%, throughout this year, maintaining this level until at least 2030.
This contrasts with market expectations, which currently factor in at least two rate increases by the Monetary Policy Committee before the end of the year.
Comparative Forecasts and Bank of England Actions
Earlier in the week, Lloyds Banking Group projected GDP growth of 0.5% for the year as its base case.
On Thursday, the Bank of England voted to maintain the current interest rate but cautioned that increases might be necessary later in the year, stating that
"higher inflation is unavoidable"due to the Middle East conflict.
Housing Market and Banking Industry Outlook
NatWest also forecasted that house prices will increase by an average of 0.7% this year, followed by a 1.8% contraction in 2024 and a 0.5% decline in 2028.
The banking sector has seen benefits from market volatility linked to the Middle East conflict. NatWest expects its income for the year to approach the upper end of its previous guidance range of £17.2 billion to £17.6 billion.
