NatWest to buy £2.5bn of Metro Bank mortgages as profits fall

NatWest has agreed to buy a £2.5bn residential mortgage portfolio from Metro Bank.

The high street banking giant posted a 16 per cent decline in pre-tax profits to £3bn for the six months to June 30.

NatWest attributed the fall, which was better than analysts had expected, to weaker mortgage margins as repayments offset new borrowing, while competition in the savings market also prompted customers to switch their deposits to higher-paying products.

Taxpayers’ stake in NatWest has halved to less than 20 per cent over the past year, but the Conservatives’ proposed Tell Sid-style public share sale was called off once the general election was called.

NatWest’s total revenue of £7.1bn fell 7.7 per cent from the same period last year, while the net interest margin (a key measure of profitability between savings and loans) fell 16 basis points to 2.07 per cent.

Banks had initially made bumper profits as the Bank of England rapidly raised interest rates and mortgage costs rose faster than savings yields. But a stagnation in the mortgage market, combined with pressure to offer savers better rates, has squeezed profits.

NatWest, which says it added “more than 200,000 new customers” in the first half, was cushioned by a surge in lending and the impact of having one more day in the first half of this year than in 2023.

But costs were also £149m higher than the same period last year, reflecting costs related to a potential retail share offering of £24m, additional bank levies of £83m and a net impairment charge of £48m.

However, NatWest has raised its full-year return on tangible equity expectations from 12 to 14 per cent on revenue of £14bn (up from £13 to £13.5bn previously).

Boss Paul Thwaite said: ‘The positive momentum and progress in the first half reflects the bank-wide ambition to reach its full potential.

‘Our clients are beginning to feel more confident, with activity increasing and asset quality remaining strong, and we are well positioned to help unlock growth across the UK through our unrivalled regional network.

“Basically, if we are successful for our customers, we will be successful for our shareholders and for the economy at large.”

The first-half result echoes that of rival Lloyds, which also reported a better-than-expected drop in profits on Thursday despite a weaker mortgage market.

NatWest raised its interim dividend by 9 percent to 6 pence a share.

Natwest shares rose 7.6 percent to 363.9 pence on Friday morning, taking gains since the start of 2024 to almost 70 percent.

Metro Bank sells its mortgage portfolio to NatWest

On Friday it also emerged that NatWest would pay Metro Bank up to £2.4bn in cash for a portfolio of residential mortgages with a gross book value of £2.5bn.

The deal reflects NatWest’s wider efforts to expand the group, which is set to gain a million more customers following a deal to take over most of Sainsbury’s banking division.

Metro Bank said the mortgage portfolio it will sell to NatWest has a weighted average mortgage rate of 3.79 per cent and consists primarily of amortising mortgages with an average remaining fixed-rate term of 2.3 years.

“The portfolio has a similar geographic spread to Metro Bank’s broader mortgage portfolio and has a weighted average current loan-to-value ratio of approximately 62 percent,” he added.

At a 4.2 per cent discount to gross book value, the deal represents an estimated £105m loss on the sale because the loans were originated in a lower interest rate environment.

Metro Bank boss Daniel Frumkin said: ‘The sale of part of our residential mortgage portfolio is accretive to earnings, NIM and the capital ratio.

“The sale is in line with Metro Bank’s strategy to reposition its balance sheet to achieve higher risk-adjusted returns on regulatory capital. The additional lending capacity provided by this sale will allow us to continue our transition towards high-yield assets in specialist and underserved markets and become a specialist lender of choice.”

Metro Bank shares rose 3 percent to 39 pence in early trading.