By Elena Vardon

NatWest said it expects an acceleration in income growth and profitability this year despite a limping U.K. economy, building on its fourth-quarter results, which beat hopes.

Chief Executive Paul Thwaite said the bank is optimistic about the opportunities ahead as it started 2025 on a positive trajectory.

The British lender saw resilience and good levels of activity in its customer base despite a dip in consumer and business confidence toward the end of last year, he said. The U.K. economy saw weak growth in the final quarter of 2024 with strong activity in the services sector helping it avoid stagnation, statistics released this week showed.

"Against an uncertain external backdrop, we made good progress on our strategic priorities, grew all three of our customer businesses, and saw an acceleration in the reduction of the U.K. government's shareholding," Thwaite said.

For the year ahead, the bank forecasts that its total income excluding notable items will come in between 15.2 billion pounds and 15.7 billion pounds ($19.10 billion-$19.73 billion) in 2025 as loan growth and structural hedges continue to mitigate the impact of interest-rate cuts by the Bank of England. This is up from the 14.70 billion pound result it reported for 2024, which was roughly flat on the previous year.

It also guided for its return on tangible equity--a key measure of profitability--to land between 15% and 16% this year, and expects the metric to be greater than 15% in 2027. The uplift from a previous target of above 13% for 2026 and a 17.5% result last year suggests that management is confident in the bank's future performance.

The lender also pencils in costs to remain roughly flat at 8.1 billion pounds this year, a figure which includes 100 million one-off charge from its integration of the core banking operations of supermarket chain Sainsbury's and a portfolio of prime residential mortgages from Metro Bank, which it bought last year.

"The setup for 2025 is one of cautious optimism, with borrowers remaining resilient, inflation in a more manageable place, and a U.K. economy that's trying its hardest to squeeze out some growth," Hargreaves Lansdown analyst Matt Britzman said in a market comment.

For the three months ended Dec. 31, NatWest--which the U.K. government is on track to return to private ownership in the first half of this year--posted a 19% on-year increase in its pretax profit of 1.49 billion pounds, beating estimates of 1.36 billion pounds taken from a company-compiled consensus.

Fourth-quarter total income rose 8% to 3.825 billion pounds, ahead of the 3.71 billion pounds forecast by analysts. Net interest income--the difference between what banks earn on loans and what they pay clients for deposits--made up the bulk of this and edged up on the previous quarter, delivering a net interest margin of 2.19%.

NatWest's common equity Tier 1 ratio--a key measure of balance-sheet strength--stood at 13.6% at Dec. 31, in line with expectations and its mid-term target of between 13% and 14%.

The government this week lowered its stake in the bank by a further percentage point to around 7%, a regulatory filing showed on Friday. The state has steadily been winding down its shareholding from 38% in December 2023 through its trading plan and directed buybacks.

The holding in the bank resulted from its financial crisis-era bailout of Royal Bank of Scotland, which bought NatWest in 2000 and rebranded the enlarged company as NatWest Group in 2020. The U.K. spent 45.5 billion pounds on the bailout and, at one point, owned 84% of the bank.

Shares in NatWest, which have more than doubled over the past year, slipped in European morning trading. Analysts pointed to the conservative estimates issued by the bank which already were captured by market expectations. The guidance underpins the relatively predictable nature of the earnings and distributions, Jefferies analysts said in a note to clients.

Some also flagged potential disappointment at the lack of a share-buyback announcement. The bank declared a 21.5 pence per share dividend for the year and said it is lifting its payout policy to 50% this year instead of next, from 40% previously.

Write to Elena Vardon at elena.vardon@wsj.com

(END) Dow Jones Newswires

February 14, 2025 05:25 ET (10:25 GMT)

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