NatWest shares surge after profits beat expectations

Profits at NatWest surpassed expectations in the three months to the end of June, pushing the share price of the state-backed lender more than 8% higher during early trading on Friday.

NatWest, which has been one of the FTSE 100’s best-performing stocks this year, notched up profits of £1.7bn during the quarter, beating forecasts of £1.3bn.

NatWest chief executive Paul Thwaite says: “We have made good progress against our strategic priorities, taking decisive action to grow and simplify our business and to manage our capital and costs more efficiently.”

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The bank, which was at one stage 84% owned by the state after a £46 billion bailout at the height of the financial crisis, also revealed that it had spent £24 million on shelved Tory government plans for a retail share sale in the lender. The costs were racked up to pay for advertising and preparations for sale, which had been due to launch in the summer before the surprise 4 July election announcement.

Labour has yet to confirm whether it will proceed with the share sale plans. Thwaite said he would expect any announcement about a potential sale to come in the government's next fiscal event, although he stressed it was a decision to be made by the Treasury.

Although NatWest's profits beat expectations, for the first half of the year they were lower than during the same period in 2023. The same was true at TSB where profits dropped by almost a quarter in the six months to the end of June on the back of lower margins from the UK lender’s mortgage business. 

Earlier this week, the high street bank, which is part of Spain's Banco Sabadell, posted pre-tax profits of £111.6 million during the period, down 24.5% against the same six months a year earlier.

TSB said income was impacted by lower mortgage margins due to "challenging" market conditions in the face of high interest rates, while the company also paid out significantly more interest to its savings customers.

UK interest rates are currently sitting at a 16-year high of 5.25%, meaning mortgage rates remain high. As a result industry body UK Finance said that it expects total lending for house purchases to fall by a further 8% this year to £120 billion.

James Tatch, head of analytics at UK Finance, says: “We expect lending to remain weak in 2024, with a gradual improvement in affordability reflected in a modest increase in activity levels in 2025.”

Will the Bank of England cut interest rates this summer? 

Barring any economic shocks, interest rates have peaked. The question now is how long the Bank of England will hold rates at 5.25%. The Bank of England has four remaining meetings this year, with the next announcement due to take place on 1 August. 

Over the past few months, we have seen the MPC start to turn – however it remains visibly divided. In February and March’s meetings, one committee member voted for a rate cut. This increased to two committee members in May and June. 

The latest poll from Reuters showed that 80% of economists expect a rate cut in August, however markets are only pricing in a 45% chance of this happening, suggesting the decision could rest on a knife edge.

Services inflation seems to be the main factor that is keeping interest rates high, although wage growth is still coming in hot too at 5.7%. What’s more, May’s economic growth figure (0.4%) came in at double the rate expected when released on 11 July. 

“This snapshot of an economy growing a bit faster than forecast, could make Bank of England policymakers that bit more reticent about voting for an interest rate cut on 1 August,” says Susannah Streeter, head of money and markets at Hargreaves Lansdown.