By Iain Withers and Lawrence White
LONDON (Reuters) - NatWest (L:NWG) reported better than expected third quarter profit as COVID-19-linked provisions for bad loans dwindled, but it warned tougher times lie ahead as fresh social and economic restrictions to curb the pandemic begin to bite.
The bank posted a 355 million pound pre-tax profit for the July-September period, compared to a 75 million pound loss in an average of analyst forecasts.
NatWest booked a further 254 million pounds provision for expected bad loans - less than half the 628 million pounds forecast - and said provisions for the year would be at the lower end of a 3.5-4.5 billion pound range previously given.
Rivals Lloyds (L:LLOY), HSBC (L:HSBA) and Barclays (L:BARC) also set aside smaller provisions in their third quarter earnings compared to earlier in the year, as government financial support measures delay some economic pain to next year.
Despite the improved picture, UK banks are still under huge pressure with the total financial toll of the pandemic still unclear and from rock-bottom central bank interest rates.
NatWest's market value on the London stock exchange has halved this year due to the torrid outlook, with rival Lloyds falling by a similar amount.
"Challenging times lie ahead, especially as the current government support schemes come to an end and as new COVID-19 related restrictions are introduced," said NatWest Chief Executive Alison Rose.
The quarterly profit for NatWest came despite a 324 million pound charge for buying back its own debt, as it redeemed some bonds set to lose their regulatory capital benefits and therefore become too expensive, the bank said.
NatWest's net interest margin - the difference between the money it makes on lending and pays out on deposits - came under further pressure in the quarter, falling two basis points to 1.65% compared to the previous quarter.
The bank had plunged into the red in the first half of this year on a 2.9 billion pound provision against potential loan losses.
NatWest remains 62% owned by taxpayers following its bailout in the 2008-09 financial crisis.
Despite pressure on profits across the industry, NatWest strengthened its core capital ratio - a key measure of financial strength - further to 18.2%, up from 17.2% previously.
Before the pandemic the bank had been stockpiling capital to give it the firepower to buy back government-owned shares, but a fall in bank stocks since the crisis has delayed this plan.