By Iain Withers and Lawrence White
LONDON (Reuters) -NatWest's profit tripled in the third quarter as Britain's resurgent economy buoyed its finances, but its margins contracted in a sign of potentially tougher times ahead.
State-backed NatWest reported a pre-tax profit for the July-September period of 1.1 billion pounds ($1.52 billion), up from 355 million pounds a year ago.
The profit came despite a 294 million pound litigation and conduct charge, which includes a provision for a fine after NatWest pleaded guilty this month to failing to prevent money laundering.
NatWest's profits were flattered by a release of bad loan reserves totalling 242 million pounds, following similar moves this month by rivals Barclays (LON:BARC), HSBC and Lloyds (LON:LLOY).
Shares in NatWest fell more than 5%, however, as investors looked past the headline profit figure to a shrinking net interest margin, a core measure of profitability, that highlights its biggest headache.
Without the investment banking business of Barclays or the exposure to faster-growing Asian markets of HSBC, NatWest is among the most exposed to the British economy.
A contraction in its net interest margin to 1.54%, from 1.65% a year ago, shows how rock-bottom central bank rates have squeezed the income it can make from lending, leaving it reliant on hoped-for benchmark rate hikes.
NatWest, Britain's biggest business bank, said while the economic outlook had improved, risks remained.
"Although we are seeing challenges in the economy and for our customers - especially around supply chains and the cost of living - a number of key indicators remain positive; growth is good, unemployment is low and there are limited signs of default across our book," Chief Executive Alison Rose said.
DEEP REGRET
NatWest became the first lender to admit criminal offences under a 2007 money laundering law, in an embarrassing setback to Rose's attempts to clean up its image, including a rebrand from the scandal-tainted Royal Bank of Scotland (NYSE:RBS_old_old) name.
The Financial Conduct Authority said NatWest failed to monitor suspect activity by a client that deposited about 365 million pounds over five years, including 264 million in cash.
NatWest said it would not disclose the exact provision for the fine, which will ultimately be determined at a sentencing expected in December, as court proceedings are ongoing.
A lawyer for the FCA told Westminster Magistrates' Court earlier this month the bank could face a potential penalty of around 340 million pounds.
In a call with reporters, Rose said it was a "historic case affecting one of our customers", adding "We deeply regret what happened." The offences took place between 2012 and 2016, predating her tenure as CEO.
The FCA's decision not to act against current or former bank employees was questioned by lawmakers.
($1 = 0.7253 pounds)