NATWEST Group, the owner of Royal Bank of Scotland, beat market forecasts by posting a near-50 per cent rise in first-quarter profits to £1.8 billion, driven by the boost to income from higher interest rates.

But the lender saw its share price closed the day down nearly four per cent, as attention focused on a £20bn fall in customer deposits over the period.

Chief executive Alison Rose said the performance of the bank in the opening quarter had been strong despite the “significant market volatility” that followed the collapse of Silicon Valley Bank in the US and saw the Swiss government and regulators step in to support the emergency takeover of Credit Suisse by UBS.

NatWest reported that total income had increased by £1.036bn or 37.2% in the first quarter to £3.9bn, with net interest margin at 3.27% compared with 2.45% a year earlier.

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Ms Rose said the first-quarter results had been “underpinned by our robust balance sheet, our high levels of capital and our well-diversified loan book”.

She declared the bank’s capital strength and liquidity meant it had been able to increase lending £5.7bn, or 1.6%, to £352.4bn over the quarter, and expressed the view that there were early signs of confidence returning to the economy, highlighting the improved business confidence shown by its most recent PMI (purchasing managers’ index) report, while recognising that businesses and households remain under pressure from higher inflation and rising interest rates.

With interest rates having increased to 4.25% – Ms Rose reckons there could be one further rise in the base rate by the Bank of England – the bank acknowledged it was facing competition as it bids to attract savers.

NatWest reported customer deposits had fallen to £430.5bn on March 31 from £450.3bn on December 31. Excluding deposits linked its exit from Ulster Bank in the Republic of Ireland, deposits fell by 2.6% or £11.1bn. The bank said the fall reflected around £8bn of customer tax payments, competition for deposits, and an overall market liquidity contraction.

Speaking to reporters, Ms Rose signalled NatWest was taking the fall in deposits in its stride. She the market volatility in March “did not affect our deposits” and noted people were using cash balances built up during Covid to pay down more expensive debt such as mortgages, which she said reflected rational financial management.

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She told reporters the bank “always said that seasonality would affect them (deposits) in Q1.”

Ms Rose said: “We saw tax payments obviously coming out. We continue our strategic withdrawal from Ulster [Bank], so that was a planned reduction, and [we saw] a little bit more increased competition. Our loan to deposit ratio, 83%, is very robust and strong. But no issues from the market.”

Highlighting the strength of the bank’s balance sheet, liquidity levels, and diversity of its loans portfolio, she added: “We have seen customers behaving really rationally around their financial affairs, which is good. We have seen some pay-down of more expensive debt, people maybe looking to pre-pay mortgages a little bit as well.

“I think that is good financial management. Our free financial health checks we offer really do help people think about the budget on that side. Then there is a little bit more competition for deposits, which we are comfortable we are competing effectively for and have all the right products.

“Q1 is always a period where there is a lot of seasonality. But overall, we are comfortable we are not seeing anything idiosyncratic in that behaviour. [We are] very comfortable with that position.”

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Ms Rose said the bank’s guidance for the full year was unchanged. While she said the “macroeconomic environment remains challenging”, with high interest rates and inflation, the bank was seeing “very low levels of stress and impairment”.

She noted: “There are signs to be positive. It’s tough, but there are signs of positivity.”

Meanwhile, asked whether the bank had seriously considered bidding for the UK arm of Silicon Valley Bank, which was acquired by HSBC, Ms Rose said NatWest had a “market-leading position in small businesses and start-ups [with a] 16.4% market share”.

“It wasn’t something that we felt would add anything strategically to us.”

NatWest recently quit its membership of the Confederation of Business Industry (CBI) following allegations of sexual misconduct by male employees at the business lobby group.

Ms Rose told reporters yesterday: “Clearly, the news that has come out has been extremely disappointing, and of great concern. We have as you know withdrawn our membership from the CBI.

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"I think it is really important that business has a strong voice… and that it represents the values of business, and what business stands for. I think that is what we will be looking for. But at this stage we have withdrawn our membership. We are very disappointed with the reports that have come out. Clearly, that is unacceptable behaviour, which is why we have withdrawn our membership.”

Shares in NatWest closed down 3.75% at 262p.