Fall in bad debts helps NatWest to 83% surge: Increasing competition and rising costs worry analysts

NATIONAL Westminster Bank has enjoyed an 83 per cent rise in half-year pre-tax profits to pounds 767m based on a hefty cut in bad debt provisions, but analysts are worried by increasing competition and rising costs.

NatWest has just over a quarter of the small- to medium-sized British company market and its 42 per cent cut in bad debt provisions to pounds 370m reflected the recovery from recession.

Lord Alexander, chairman, said: 'When bad debts are high we get pilloried. When they are low we don't get the benefit (from the media). This shows sound provisioning in the recession.'

The dividend for the six months to 30 June was raised by 14 per cent to 7.3p and the shares added 17p to 470p.

Disregarding provisions, net interest income was down 4 per cent and operating profit fell 9 per cent to pounds 1,120m. This compared with an 8 per cent rise in net interest income at Lloyds, which reported last Friday, and a 2 per cent rise at Abbey National on Monday.

Profits at the investment banking arm, NatWest Markets, fell by pounds 55m to pounds 201m, including a small profit on the bond portfolio in the first half. The US retail arm, NatWest Bancorp, enjoyed a profits rise of 30 per cent to pounds 117m as bad debts collapsed and interest income improved.

NatWest is investing heavily in NatWest Markets and Bancorp, both of which have changed from being possible casualties of the recession to motors for growth. International Businesses, which includes retail operations and private banks such as Coutts, is also expanding.

But the cost, including a recruiting drive at NatWest Markets, has been heavy as overall costs have risen 4 per cent. NatWest's key cost-income ratio rose to 67.6 per cent from 66.6 per cent, partly because of a 6 per cent rise in staff costs.

By contrast, Barclays, the other big corporate lender, is expected to report flat or even falling costs next Tuesday. Lord Alexander said there was unlikely to be much improvement in NatWest's ratio this year.

He continued: 'We operate in very competitive markets, some of which have been characterised by slack demand. This puts pressure on income, which held up very well during the recession.

'We have nonetheless continued to invest in future growth and this has led to some deterioration in trading surplus (operating profit) and the cost-income ratio.'

Analyst Simon Samuels, of Smith New Court, said: 'The headline profits figure is good but the mix is disappointing. Operating profits fell but were bailed out by bad debt provisions falling even faster. The problem is controlling costs.'

Lord Alexander admitted that improving income from branch banking was difficult because of the lack of demand for lending, which might not grow substantially for a year or two, but a recovery in lending by companies and individuals could not be forced.

Fixed-rate lending to companies had, however, experienced a turnaround in April, he said.

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