NatWest, one of the UK's largest high-street lenders, reported a pretax profit of £2.2 billion for the July-to-September period, matching the same quarter last year. The result came as the bank faced growing pressure on its deposit margins, a key measure of profitability, due to fierce competition among UK banks for savers' cash.
The bank also confirmed it is sticking with its full-year financial targets, a sign that management believes the current headwinds are manageable. The steady profit, despite the margin squeeze, suggests that other parts of the business—such as lending and fees—are helping to offset the higher cost of deposits.
Why deposit margins are under pressure
Deposit margins refer to the difference between what a bank pays out to savers and what it earns from lending that money out. For years, UK banks paid very little on savings accounts, especially when interest rates were near zero. But as the Bank of England raised interest rates to combat inflation, banks came under pressure to pass on those higher rates to savers.
Now, with competition for deposits intensifying—both from traditional rivals and newer digital banks—lenders are offering more attractive savings rates to retain and attract customers. That raises the cost of funding for banks, squeezing the margin they earn on deposits. NatWest's experience reflects a broader trend across the UK banking sector, where the era of cheap deposits is fading.
Similar dynamics are playing out across Europe. For instance, Credit Agricole's recent profit jump was partly driven by strong trading and retail lending, but it also faces the same competitive pressures on deposits. In Spain, Unicaja's profit growth came from consumer lending, not from deposit margins.
What this means for investors
For everyday investors, NatWest's results offer a window into the health of the UK banking sector. A steady profit is reassuring, but the growing cost of deposits is a trend worth watching. If competition continues to intensify, banks may find it harder to maintain their profitability, which could affect their share prices and dividends.
NatWest's decision to hold its full-year targets suggests that management is confident about the rest of the year. However, investors should be aware that the bank's net interest margin—a closely watched metric—could come under further pressure if deposit competition remains fierce.
It's also important to remember that banks are cyclical businesses. Their fortunes are tied to the broader economy, interest rates, and the housing market. While NatWest's current performance is solid, future results will depend on how these factors evolve.
Broader market context
The UK banking sector has been in focus recently as lenders report their third-quarter earnings. While some banks have benefited from higher interest rates, the competitive landscape is shifting. The rise of digital banks and the increasing willingness of savers to shop around for better rates are forcing traditional lenders to adapt.
NatWest's experience is not unique. Across the Atlantic, big oil profits have surged, but banks are facing their own set of challenges. In the UK, the Bank of England's rate decisions will continue to influence how banks price their loans and deposits.
For investors, the key takeaway is that NatWest is holding its ground, but the environment is becoming more competitive. The bank's ability to manage its deposit costs while maintaining profitability will be a critical factor in the coming quarters.
Looking ahead
Investors will be watching NatWest's next moves closely. The bank's full-year guidance, which it has reaffirmed, will be tested if deposit competition intensifies further. Also on the radar is how the UK economy performs, as a slowdown could lead to higher loan losses.
NatWest's steady profit is a positive sign, but it's not a reason for complacency. The banking landscape is evolving, and the winners will be those who can navigate the shifting dynamics of deposits, lending, and customer expectations.
As always, it's wise for investors to consider how such trends fit into their broader portfolio. Banks are a key part of many investment portfolios, and understanding the forces shaping their profitability is essential.
