NatWest's profits fall, widely expected by the market, was the result of a loss of pounds 719m on sale of businesses that included Bancorp, its US banking operation, costs of pounds 186m on the redesign of its UK retail banking operations and a gain of pounds 224m on the sale of its stake in 3i, the venture capital company.
Stripping out the charges, underling profits at NatWest rose by pounds 339m to pounds 1.61bn. However, its share price fell 36p to 776.5p on disappointment that it did not announce plans to return capital to shareholders as Barclays did last week.
In contrast with Barclays, which announced sharply lower profits at BZW, its investment banking arm, NatWest's investment bank produced higher pre-tax profits of pounds 462m, up from pounds 304m. But the result, included a fall in bad debt provisions to from pounds 114m to pounds 18m.
Overall, NatWest increased its general provisions against bad debts by pounds 50m and made specific provisions of pounds 499m.
Lord Alexander, chairman, said NatWest was forecasting a slower pace of economic growth in the UK next year and would therefore adopt a more cautious approach to lending.
"Interest rates have to rise. This is our scenario whichever party wins the election," Lord Alexander said.
Derek Wanless, chief executive, said this would involve a more cautious policy towards lending to small businesses and the construction and property areas. This was the time in the economic cycle - rising growth and rising consumer confidence - that banks traditionally "lost it" by increasing lending.
NatWest did not intend to fall into this trap and therefore, based on economic forecasts by David Kern, its chief economist, was preparing for a slower economic growth next year which might make it harder for businesses to repay debts.
"Their management is at odds with what is being preached by management elsewhere," said Peter Toeman, banking analyst at ANM Amro Hoare Govett. However, he said this did not mean it would not proven to be correct.
Lord Alexander said 1996 was the culmination of the re-shaping of NatWest. Its retail bank, which laid off more than 3,000 staff during the year and has plans to make a further 10,000 redundant in the years ahead, included costs of pounds 186m as it shut down more than 300 branches around the country.
The bank expects to incur a further pounds 100m of costs in retail banking this year to cover the cost of introducing new technology.
Across the entire group, the bank will spend another pounds 100m to reprogramme its computers to deal with the date problem arising from the turn of the millennium.
The bank's retail operation recently saw a deal with Tesco to offer banking from its supermarkets fall apart, and Mr Wanless said talks were being held with lawyers about seeking compensation from the supermarket chain.
At NatWest Markets, the investment banking arm, staff costs shot up from pounds 510m to pounds 726m, largely as a result of higher bonuses.
Martin Owen, chief executive of NatWest Market, said the higher figure also reflected the costs of acquisitions through the year.
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