NatWest Group has purchased a £2.4 billion residential mortgage portfolio from smaller rival Metro Bank, while simultaneously upgrading its performance outlook for 2024.

The deal, announced on Friday, represents a significant move for both banks in the competitive UK mortgage market.

For NatWest, the acquisition aims to increase its scale in retail banking amidst fierce competition that has been squeezing margins. The bank's chief executive officer, Paul Thwaite, expressed optimism about the economic outlook, stating, "Our customers are beginning to feel more confident, with activity increasing and asset quality remaining strong."

Despite reporting a 16 per cent drop in first-half operating profit to £3 billion, NatWest has raised its 2024 forecast for return on tangible equity to above 14 per cent, up from the previously expected 12 per cent. The bank also anticipates income for the year to reach approximately £14 billion, an increase from earlier projections.

For Metro Bank, the sale provides a much-needed cash injection. The challenger bank, which launched in the wake of the 2008 financial crisis, has struggled to achieve profitability in a market dominated by established lenders with access to cheaper funding. Last year, Metro Bank secured a £925 million rescue deal after experiencing significant deposit outflows.

The sale of the mortgage portfolio aligns with Metro Bank's strategy to reposition its balance sheet and enhance risk-adjusted returns on capital. However, the bank will realise a £105 million loss on completion of the sale, as the mortgage book was originated when interest rates were lower.

The transaction comes as the UK government continues to reduce its stake in NatWest following the 2008 bailout. Earlier this month, the government's ownership fell below 20 per cent for the first time since the financial crisis.

On Friday, Bloomberg reported that Chancellor Rachel Reeves wants to offload a 'substantial portion' of its remaining £5.6 billion stake in NatWest to institutional shareholders, abandoning the previous government's plans to offer shares to the UK public.

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