Last year was a tumultuous one for NatWest Group.

The lender was engulfed in a damaging row over ‘de-banking’, during which it lost its highly-regarded former chief executive, Dame Alison Rose.

NatWest confirmed this morning – as reported earlier this week by Sky’s Mark Kleinman – that Paul Thwaite, the bank’s former commercial banking chief who has been doing the job on an interim basis since Dame Alison’s resignation, will become chief executive on a permanent basis.

The de-banking row, with the former UKIP leader Nigel Farage, also cost Peter Flavel, the former Coutts chief executive, his job.

What it does not appear to have done, though, is damage the bank’s profitability.

Profits

The UK’s biggest lender to small and medium-sized businesses reported a full-year operating profit before tax of £6.2bn – up 20% on 2022.

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An increase was certainly to have been expected, given the way interest rates continued to rise until August 2023, as higher interest rates tend to flatter the net interest margin (the spread between what a bank charges borrowers and pays depositors).

But the figure was significantly better than the £5.95bn or so that the market was expecting. It represents the best annual profits at the bank, previously known as Royal Bank of Scotland, since it became engulfed by the global financial crisis in 2007.

Beating expectations

In fact, on nearly every measure going, NatWest’s results came in ahead of expectations. Operating profit before tax for the final three months of the year came in at £1.3bn, down 12% on the same quarter in 2022, but again appreciably better than expected.

The net interest margin for the final three months of the year slipped to 2.86% from 2.94% in the three months to September and from 3.2% in the same quarter in 2022, but again, it was better than expected.

The decline can be explained by the fact that savers have become more adept at moving their money around to obtain a more competitive rate of interest as well as pressure from politicians – not just the government but also the Commons Treasury Select Committee – on the banks to offer better rates.

Read more in the Sky News money blog

Meanwhile, the amount NatWest set aside to cover loans it does not now expect to be fully repaid rose to £578m for the year as a whole, up from £377m in 2022, but the sum for the final three months of the year was down on the equivalent period a year earlier, again better than expected.

Other measures by which NatWest beat market expectations include earnings per share, return on tangible equity (RoTE – a measure of a company’s ability to generate profits) and the dividend.

What it all means

The fact that NatWest exceeded expectations on almost every count suggests a couple of things. One is that the bank’s investor relations department has been assiduously talking down its prospects to the City analysts whose job is to follow its fortunes.

The other is that the bank is being prettied-up ahead of the retail share offer planned for later this year.

Jeremy Hunt, the chancellor, has made clear he would like to see some of the government’s 35% stake in NatWest – a legacy of its £45bn bailout in the RBS days – sold to the public.

Regardless of all that, it was a decent performance, one which bodes well as the other major UK banks – Barclays, HSBC, Lloyds and Standard Chartered – prepare to update the market next week. NatWest shares, after a brief wobble at the open, were up by more than 6.5% by mid-morning.

The biggest question is what is coming next and given NatWest’s size and importance – it has 17.8 million retail customers and 1.5m business customers – what it means for the UK economy.

Economy forecasts

NatWest’s assumption is that the Bank of England‘s main policy rate – Bank rate – will fall from the current 5.25% to 4% by the end of this year and to 3% by the end of next year.

It is also expecting UK GDP to grow both this year and next. This is slightly more positive than its previous expectations.

But the bank warned in the statement: “The economic outlook remains uncertain. We will monitor and react to market conditions and refine our internal forecasts as the economic position evolves.”

That said, Mr Thwaite pointed to a number of interesting trends that NatWest has identified, most notably that customers appear to be paying down their debt in a higher-rate environment.

He noted that there were early signs of improving mortgage demand as customer rates fall and that customers were adapting to higher interest rates – with arrears at NatWest, the UK’s third largest mortgage lender by outstanding balances, remaining low.

Guardedly optimistic

Less encouragingly, he also observed that while business confidence was improving, overall demand remained muted.

That points to a guardedly optimistic outlook overall.

Lower interest rates, though, will make it tougher for NatWest to carry on growing profits at the rate it has been since the Bank of England began raising the cost of borrowing in December 2021.

One of the few disappointments in today’s statement was that Mr Thwaite guided investors to a RoTE this year of around 12% – down from 17.8% in 2023 and lower than the previous range of 14-16% to which it was previously guiding investors.

Accordingly, Everton-supporting Mr Thwaite was stressing today that he sees plenty of opportunities to simplify the way the bank is running, bringing down its costs in the process.

He also cited a number of product lines, particularly unsecured lending and mortgages, where the bank is keen to build market share.

He told analysts: “I’m very focused on driving the performance and returns of NatWest. We’ll deliver the best we can for our customers and our shareholders moving forward.”

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That will raise hopes that, as the government prepares to sell shares in NatWest to the public, the lender will still have wind in its sails.

However, as interest rates come down, growing profits will become harder.

And that task will be harder still if UK GDP continues to flatline.

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