IT is one of the peculiarities of the stock market that a company’s share price can fall even as it serves up a huge rise in profits.

That was the case for Royal Bank of Scotland owner NatWest Group on Friday, which despite reporting forecast-beating, third-quarter operating profits of £1.1 billion, was rewarded on the day with a 4.4 per cent fall in its share price.

In making investment decisions, stock market players comb through results statements for signs of bumps in the road or, on the flip side, indications of opportunities, that may affect future performance.

At NatWest, which remains 54.7 per cent owned by UK taxpayers following its bail-out at the height of the financial crisis, there looked to be nothing particularly worrying with regard to how it saw the wider economic outlook.

In fact, the bank was sufficiently confident to release yet more provisions it had made for loans going bad because of the fall-out from the pandemic, such was its assessment of the economic recovery from coronavirus.

The bank released £242 million of provisions in the third quarter as credit conditions remained benign and loan defaults low, taking to £949m the total amount of impairment provisions it has released this year. Chief executive Alison Rose said the bank was “cautiously optimistic” over the outlook.

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Sentiment towards the economy was broadly similar at rival Lloyds Banking Group when it reported its third-quarter results the day before. Lloyds said it now expects to book a net credit for loan impairments for the year as it lifted its profit guidance. It too has released hundreds of millions of pounds previously set aside for bad loans arising from the pandemic.

However, at NatWest analysts homed in on a decline in bank net interest margin (NIM)– in broad terms, the difference between the interest a bank pays on deposits and what it charges on products such as loans –which appeared to raise a red flag to investors.

The bank reported that its NIM had fallen to 1.54% in the third quarter ended September 30, down from 1.61% in the three months to June 30, and lower than the 1.65% reported at the same stage last year. This was in contrast to Lloyds, where NIM was booked at 2.55% in the quarter ended September 30, up from 2.42% at the same stage in 2020.

Investors seemed spooked by the margin fall at NatWest, and all the more so because Lloyds, one of its main rivals and the owner of Bank of Scotland, had seen its NIM move in the opposite direction. It is a divergence that caused some disquiet among investors, according to Michael Hewson, chief market analyst at CMC Markets. He also noted that provisions made by NatWest for a potentially huge fine after it pleaded guilty to breaches of money laundering regulations, relating to the accounts of a UK incorporated customer between 2012 and 2016, may also have weighed on sentiment.

“Lloyds upgraded their net interest margin, NatWest did the opposite,” Mr Hewson told The Herald. “It was lower despite the rise in profit. That to me has always been the Achilles Heel at NatWest; they have this real problem... [in] taking advantage of the much better interest rate environment.

“Looking past the quarterly numbers, the bank is still well ahead of where it was a year ago, certainly in terms of profit. But net interest margins have fallen back in Q3 from where they were in Q2. In Lloyds’ case they have gone up.”

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The pressure on NIM at NatWest comes amid speculation that the Bank of England is poised to lift the base rate from its historic low of 0.1% in a bid to combat surging inflation. In the build-up to the latest vote on interest rates by the Bank’s Monetary Policy Committee, the result of which is due to be announced at noon today, opinion has been divided as to whether a rise would be the best course of action at this juncture.

Concern has been expressed in some quarters that a rise in borrowing costs would heap more pressure on households already struggling to absorb increasing food and energy bills amid the fall-out from Brexit and blockages in global supply chains. Some observers have also argued that a rate rise should be delayed because of uncertainty over the longer-term outlook for the economy.

From the perspective of banks, a higher rate means the chance to generate more income from products such as mortgages and loans – even if it goes up by just 15 basis points.

City analysts say a rise in the base rate of that size has already been “priced in” by the market.

Indeed, Russ Mould, investment director at AJ Bell, said on Friday that NatWest had lifted its fixed-rate mortgage deals after last week’s Budget, and has been “making changes to rates for the past few months”.

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Mr Hewson signalled his belief that a rate rise will take effect before the end of the year.

“I think it is very difficult to say with any degree of certainty that it will be this week,” he said

“Put it this way, if they don’t push rates up 15 basis points this week then you have really got to ask questions about the Bank of England’s credibility, because what they have done is set the scene for a modest increase in borrowing costs. They now need to deliver on it.

“What they can do is obviously temper expectations about further interest rate rises down the line, and do what I would call a dovish rate hike.

“The markets are pricing in 1% by the end of next year. Personally, given the fact we are at 0.1% now, I think that is slightly over the top, so they can dial that back. Certainly, I don’t think there will be any harm in pushing rates back to 0.25% this week because it is already [priced in].”

Despite the reaction of the market to the fall in NIM at NatWest on Friday, Mr Hewson believes it would be wrong to get too pessimistic about the fortunes of the bank.

“In terms of the NatWest share price [for the] year to date, it has still done very well and I think you need to retain a little bit of perspective when you look at the performance of the likes of Barclays, NatWest and Lloyds,” he said.

“They are all up around 40% on the year to date, which is not too shabby. Sometimes it is very easy to get caught up in what I would call a spiral of negativity when it comes to NatWest. That said, obviously there are problems, legacy issues being a case in point.”

Mr Hewson added: “I think if we do get a modest rate rise by the Bank of England by the end of the year, and as long as the UK economy manages to hold up fairly well, then the outlook still remains fairly [positive].”