NatWest said the economic fallout from the conflict in the Middle East could cost it £140m amid slowing growth and rising inflation even as it reported profits ahead of expectations.
Overall, the FTSE 100 lender booked a £283m impairment charge and said that almost half of that was because of a reassessment of its economic forecast to “reflect increased geopolitical risk and weaker equity markets”.
The bank said it expected its base case for UK gross domestic product growth to be only 0.4% this year, half that forecast by the International Monetary Fund earlier this month.
NatWest reported a 12% year-on-year increase in operating profits to £2bn in the first three months of the year, up from £1.8bn in the same period last year. The consensus among analysts was for an average of £1.9bn.
But its shares fell as much as 4.2% in early trading on the hit from the Iran war and gloomier forecasts.
NatWest’s economic forecasts include a rise in the rate of unemployment in the UK to 5.5% this year. Last week the Office for National Statistics put the rate of unemployment at 4.9% in February but said it expected that to climb because of the conflict.
The bank said the impact of the Iran war will lead to inflation hitting 3.5% in its base case scenario.
Paul Thwaite, NatWest’s chief executive, said its base case scenario did not mean that the UK economy was heading for stagflation – the double hit of rising inflation at the same time as slower economic growth.
He said: “The events of the last six weeks or so have made the environment more uncertain for customers and businesses.
“But we are seeing a lot of resilience. Customer activity has been good, leverage for corporations is relatively low and household savings are high. But there is definitely a sentiment and confidence issue. The big question is how long the conflict lasts; a lot depends on the duration of the energy shock and the supply issues.”
Thwaite said that the bank’s base case forecasts assumed the conflict would unwind during the course of this year.
NatWest said the first quarter saw 23,000 new customers investing, compared with 50,000 across the whole of last year, while customer deposits grew by £3.1bn to £444.8bn.
The bank said gross lending rose £7.3bn in the first quarter, up 1.9% to £400bn, including £4bn to first-time buyers – with a target of £10bn this year.
“Households and businesses are being more pro-active than ever in making adjustments,” he said. “The mortgage market has been strong in the first quarter. There was a lot of acceleration of remortgage activity in March.”
On Thursday, the average two-year fixed mortgage hit 5.79%, compared with 4.83% at the start of March, according to MoneyFacts.
NatWest believes this year the Bank of England will not move to increase the base interest rate, which stands at 3.75%, and that it will be maintained at this level until at least 2030.
The market is factoring in at least two rate rises by the monetary policy committee by the end of this year.
Earlier this week, Lloyds Banking Group, which booked a £151m charge because of the changing economic conditions, forecast GDP growth of 0.5% this year as its base case.
On Thursday the Bank of England voted to leave the rate at 3.75% but warned of increases later this year, saying “higher inflation is unavoidable” as a result of the war in the Middle East.
NatWest also said that while it expects house prices to rise by an average of 0.7% this year, it forecasts a 1.8% contraction next year and a 0.5% fall in 2028.
The banking industry has benefited from the turbulence in markets because of the Middle East conflict, with NatWest saying it expected income for the year to be near the top of previous guidance of £17.2bn to £17.6bn.
In February, NatWest struck a £2.7bn deal to buy Evelyn Partners, one of the UK’s biggest wealth managers, the bank’s biggest acquisition since it was bailed out by taxpayers in 2008.
The bank, which returned to full private ownership last year, already owns the private bank Coutts.
On Friday, Santander said it had completed its multibillion pound cash deal to buy TSB. The Spanish bank struck a £2.65bn deal to buy the British high-street lender last year. However, Santander said it had now paid £2.86bn based on the change in the value of assets at TSB between when the deal was struck and its completion on Thursday.
Santander has said the takeover will result in at least £400m of cost savings, raising fears of job cuts and branch closures. The deal means Santander will become the UK’s third-biggest bank for current accounts and fourth for mortgages.
