Putting the Nigel Farage debacle aside for a second, NatWest Group PLC (LSE:NWG) has more than just a PR minefield to navigate right now.
The lender saw its net interest margins (NIM), being the difference between what it earns from loans and what it pays to savers, miss guidance by 13 basis points in the third quarter, with a -12 basis point contraction from lending margins quarter on quarter.
Consequently, NatWest lowered its full-year NIM guidance from 3.15% to 3% flat, expecting further NIM contraction in the final quarter.
Markets reacted brutally to today’s earnings call, sending shares 10% lower, a remarkable dip for a FTSE 100 financial services big cap.
But falling net interest margins are not just an issue for NatWest.
Lloyds Banking Group PLC (LSE:LLOY)’s NIM was down six bps this quarter, though unlike NatWest, Lloyds has held its full-year guidance at around 310 bps.
Barclays, on the other hand, slashed its NIM outlook again this week, having already tempered expectations by cutting guidance back in July.
Why are these margins proving a pressure point in British lenders’ otherwise solid trading statements?
The interest rate cash cow
The Bank of England’s brutal interest rate hiking cycle over the past two years has been something of a cash cow for NatWest, Barclays et al.
They have happily charged more for loans, pointing to the surging central bank rate as justification but have they raised savings rates accordingly? Not everyone thinks so.
A report published by the BoE in May noted that “the pass-through to these accounts has been unusually weak over the tightening cycle”.
This has led to accusations of profiteering among the big banks for failing to pass down to savers the massive profits earned from charging more for loans.
Hence the banks’ NIMs have widened throughout 2022 and 2023, until now that is.
Challenger banks step up
On top of political pressure to be fairer on savers, savers may simply be fed up with not getting the savings rates they think they deserve from the big banks and are sniffing out better deals elsewhere.
Commenting on Barclays’ lukewarm results, Matt Britzman, equity analyst at Hargreaves Lansdown, commented: “Consumers are no longer happy to park their cash in low-rate current accounts and are going shopping for higher yields, be that from money market funds, cash savings platforms or term deposit accounts – all of which are a hit to banking profit margins and deposit levels.”
Evidently, the free market does do its job every now and then, and with challenger banks offering better rates than Barclays, Lloyds and NatWest, the NIM bonanza appears to be coming to an end.