Executive Summary / Key Takeaways

• Return to Private Ownership and Strategic Clarity: NatWest Group has entered a new era, shedding 17 years of government ownership in H1 2025, which has sharpened its focus on disciplined growth, bank-wide simplification, and active balance sheet management to drive shareholder returns.
• Robust Financial Performance and Upgraded Outlook: The company delivered a strong H1 2025, with income growing 13.7% to £8 billion and attributable profit reaching £2.5 billion, resulting in an 18.1% return on tangible equity. This performance has led to an upgraded 2025 guidance of income greater than £16 billion and RoTE above 16.5%.
• Technological Transformation as a Core Differentiator: Significant investments in AI and data modernization, including a collaboration with AWS (AMZN) and Accenture (ACN), are creating a single customer view, enabling greater personalization, faster onboarding, and enhanced fraud protection, while streamlining operations and reducing costs.
• Strategic Acquisitions and Capital Returns: Recent acquisitions, such as the Sainsbury's Bank (JSAIY) portfolio, have bolstered customer accounts and unsecured lending market share. Concurrently, NatWest is committed to shareholder distributions, announcing a £750 million share buyback and a 58% increase in its interim dividend to 9.5p in H1 2025.
• Resilient Credit Quality and Favorable Structural Hedge: Despite macroeconomic uncertainties, NatWest maintains a diversified, prime loan book with no significant credit concerns, guiding for a loan impairment rate below 20 basis points for 2025. The structural hedge is expected to provide a substantial tailwind, with income projected to be £1 billion higher in 2025 than 2024, and increasing further into 2026 and 2027.

NatWest's Transformation and Strategic Imperatives

NatWest Group plc, a venerable institution founded in 1727, has embarked on a transformative journey, culminating in its return to full private ownership in the first half of 2025 after 17 years under government control. This pivotal moment marks a new chapter, allowing the bank to intensify its focus on a clear strategic triad: disciplined growth, bank-wide simplification, and active balance sheet and risk management. This strategy is designed to unlock its full potential as a leading UK-centric financial services provider, serving 19 million customers across its Retail Banking, Commercial & Institutional, and Private Banking and Wealth Management segments.

The UK banking landscape is characterized by intense competition and evolving customer expectations, driven by digital innovation and a demand for more personalized and efficient services. NatWest operates within this dynamic environment, leveraging its strong brand recognition and extensive domestic network to maintain a prominent position. Broad industry trends, such as the acceleration of AI-driven financial services and the increasing demand for sustainable finance, are shaping the competitive arena and creating new opportunities for banks that can adapt swiftly.

Technological Edge: Fueling Efficiency and Customer Engagement

At the heart of NatWest's simplification strategy is a profound commitment to technological differentiation and innovation, which is rapidly becoming a core competitive advantage. The company is accelerating its digital transformation through significant investments in data and artificial intelligence. A strategic collaboration with AWS and Accenture, announced in July 2025, is central to this effort, aiming to modernize data capabilities and create a platform that uses AI to provide a single, comprehensive view of customer data across the bank.

This technological advancement offers tangible and quantifiable benefits. The AI-powered platform is designed to enable greater personalization of services, faster customer onboarding, enhanced protection against fraud, and stronger customer engagement. Operationally, NatWest has digitized over 30 customer journeys in the first half of 2025, including functionalities for changing credit card and ATM limits and accessing new U.S. dollar travel accounts. In its Commercial & Institutional segment, business banking customers can now access up to £100,000 of unsecured lending within 24 hours, a service extended to commercial mid-market customers that saves colleagues approximately 2.5 hours on each application. The Private Bank has also seen improvements, such as the automatic renewal of fixed-term deposits.

Further demonstrating its commitment to modernization, NatWest has migrated its commercial customers onto a new, modern bank line platform, allowing for the decommissioning of older systems. The Private Bank is rehosting its core banking platform from a third-party provider in Switzerland to the group data center in the UK, a move expected to reduce expenditure and increase capacity. The bank is also the first UK-headquartered institution to collaborate with OpenAI to enhance customer service and productivity. These initiatives, coupled with the enhancement of its Chatbot, Cora, with generative AI to handle over 10 million customer interactions annually, and the reduction of foreign exchange transaction onboarding times for commercial clients from seven days to one day, underscore NatWest's strategic intent. This technological roadmap is not merely about efficiency; it's about building a more agile, responsive, and cost-effective bank that can deliver superior customer experiences and drive sustainable financial performance.

Disciplined Growth: Expanding Reach and Enhancing Returns

NatWest's strategic imperative for disciplined growth is evident across its business segments, supported by both organic expansion and targeted inorganic moves. In the first half of 2025, the bank organically attracted over 100,000 new customers, demonstrating the strength of its core propositions. This organic momentum was significantly augmented by the completion of the Sainsbury's Bank transaction in May 2025, which added approximately 1 million new customers, £2.4 billion of savings, and £2.2 billion of unsecured lending. This acquisition alone boosted NatWest's credit card market share from 9.7% to 11%.

Lending growth has been broad-based and robust. In H1 2025, customer lending grew 3.2% to £384 billion. Retail Banking saw a 3% increase in lending, encompassing both mortgages and unsecured products. The bank has actively broadened its mortgage proposition, including family-backed mortgages and offerings for first-time buyers, which has driven a 4% increase in its application share in this market since early 2024. Commercial & Institutional lending grew 4% in H1 2025, driven by project finance, infrastructure, sustainable finance, and funds lending, with a notable £2.7 billion in social housing lending. Private Banking also contributed, with lending growing 2% and net new assets under management inflows of £1.5 billion, representing 8.1% of opening AUM.

Customer deposits have also shown consistent growth, increasing 1% to £436 billion in H1 2025. The deposit mix remains stable, with noninterest-bearing balances at 31% and term accounts slightly increasing to 17%. Furthermore, NatWest has significantly advanced its commitment to sustainable finance, exceeding its initial £100 billion target by reaching £110 billion in climate and sustainable funding and financing. A new, ambitious target of £200 billion for climate and transition finance by 2030 has been announced, aligning with the government's transition finance strategy.

Financial Strength: A Foundation for Shareholder Value

NatWest Group's financial performance in the first half of 2025 underscores its strategic effectiveness and commitment to shareholder value. The company reported a substantial 13.7% increase in income to £8 billion, while costs were effectively managed, reducing by 1.4% to £3.9 billion. This strong operational leverage resulted in an operating profit of £3.6 billion and an attributable profit of £2.5 billion. The return on tangible equity (RoTE) reached an impressive 18.1%, with earnings per share climbing 28% to 31p. The cost-to-income ratio improved significantly from approximately 56% in the prior year to around 49% in H1 2025, reflecting the benefits of growing income and disciplined cost management.

Net interest income (NII) in Q2 2025 grew 1.6% to £3.1 billion, primarily driven by volume growth in lending and deposits, including contributions from the Sainsbury's acquisition. Margin expansion from the product structural hedge more than offset the impact of the May base rate cut, leading to a 1 basis point increase in net interest margin (NIM) to 228 basis points. The structural hedge remains a significant tailwind, with its notional value stable at £172 billion in H1 2025 and expected to remain so for the full year. Management anticipates 2025 product hedge income to be £1 billion higher than 2024, with a further increase of over £1 billion in 2026 compared to 2025, and continued benefits into 2027.

Capital generation has been robust, with 101 basis points generated in H1 2025, including 139 basis points from earnings. The Common Equity Tier 1 (CET1) ratio remained stable at 13.6%, comfortably within the target range of 13% to 14%. NatWest actively manages its risk-weighted assets (RWAs), achieving a £2.9 billion reduction in H1 2025 through measures such as significant risk transfers. This strong capital position supports significant shareholder distributions, including an interim dividend of 9.5p (up 58%) and a new £750 million share buyback program announced in H1 2025, bringing total distributions to approximately £1.5 billion.

Outlook and Strategic Trajectory: Building for Sustainable Returns

NatWest Group's management has expressed increased confidence in its future trajectory, reflected in its upgraded 2025 guidance. The company now expects income to be greater than £16 billion and a return on tangible equity above 16.5% for the full year. Looking further ahead, NatWest maintains its target of achieving returns greater than 15% in 2027. These projections are underpinned by several key assumptions and strategic initiatives.

Management anticipates two further base rate cuts in 2025, with rates reaching 3.75% by year-end, which will influence net interest income dynamics. However, the strong tailwind from the structural hedge, coupled with continued volume growth across all three businesses, is expected to drive annual income growth through 2027, outpacing wider sector growth. The bank's strategic efforts to enhance noninterest income through its customer franchise and treasury activities are also expected to contribute positively to the income trajectory.

On the cost front, other operating expenses are projected to be around £8.1 billion for the full year 2025, including approximately £100 million in one-time integration costs. The strategy remains focused on driving cost savings from business-as-usual operations to create capacity for continued investment in bank-wide simplification and technological advancements. This disciplined approach to cost management, combined with income growth, is expected to maintain a favorable cost-to-income ratio.

Credit quality remains a strength, with the loan impairment rate expected to be below 20 basis points for the full year 2025. This reflects a well-diversified, prime loan book and management's ongoing vigilance in monitoring macroeconomic conditions, supported by retained post-model adjustments for economic uncertainty. The RWA guidance for 2025 is set between £190 billion and £195 billion, factoring in disciplined growth, RWA management actions, and anticipated regulatory headwinds such as Basel 3.1.

Navigating the Competitive Arena and Mitigating Risks

NatWest operates in a highly competitive UK banking market, facing direct challenges from established players like Barclays (BCS), Lloyds Banking Group (LYG), and HSBC (HSBC), as well as indirect competition from agile fintech firms. While Barclays and HSBC boast greater international reach and investment banking prowess, NatWest distinguishes itself through its deep-rooted domestic presence and a strong focus on relationship-based banking for UK retail, commercial, and private clients. Its extensive branch network and brand recognition foster customer loyalty, providing a stable revenue base. Against Lloyds, a formidable domestic rival, NatWest's broader segment coverage, including its Private Banking arm, offers a more diversified service portfolio.

The company's technological advancements, particularly its AI-driven data platform and digital customer journeys, are crucial in this competitive landscape. These innovations enhance operational efficiency, reduce processing times, and improve customer experience, allowing NatWest to compete effectively on service quality and personalization. For instance, reducing FX onboarding times from seven days to one day directly addresses a pain point for commercial clients, attracting new business. This technological edge helps NatWest maintain pricing power in certain segments and strengthens its competitive moat against rivals who may lag in digital adoption.

Despite its strengths, NatWest faces vulnerabilities, primarily its heavy reliance on the UK market, which exposes it to domestic economic fluctuations. While its diversified loan book and prudent risk management mitigate some of this exposure, a significant downturn in the UK economy could impact revenue and market share. Regulatory changes, such as the implementation of Basel 3.1, are expected to result in RWA inflation of around £8 billion by January 2026, necessitating ongoing capital management efforts. Furthermore, the evolving competitive landscape, particularly from fintechs offering streamlined digital alternatives, could exert pressure on fees and market share in high-volume retail segments. NatWest's strategic response involves continuous investment in digital capabilities and operational simplification to enhance its agility and cost-effectiveness. The company is actively participating in prudential reviews, advocating for a regulatory framework that supports international competitiveness and the banking sector's ability to support the UK economy.

Conclusion

NatWest Group plc stands at a pivotal juncture, having successfully transitioned to full private ownership and demonstrating robust financial and operational momentum. The company's strategic focus on disciplined growth, bank-wide simplification, and active capital management is clearly yielding results, as evidenced by its strong H1 2025 performance, upgraded guidance, and commitment to significant shareholder distributions. The core investment thesis for NatWest is rooted in its ability to leverage its deep UK market presence and accelerating technological transformation to drive sustainable, high-quality earnings.

The integration of advanced AI and data capabilities, coupled with strategic acquisitions and a favorable structural hedge, positions NatWest for continued income growth and enhanced profitability. While macroeconomic uncertainties and evolving regulatory landscapes present ongoing challenges, the bank's resilient credit quality, disciplined capital allocation, and proactive approach to risk management provide a solid foundation. For discerning investors, NatWest Group represents a compelling opportunity to participate in the growth of a transformed, digitally-forward, and shareholder-focused UK banking leader.