Loan demand in the UK remains flat, however, and the domestic personal market is tough. Moves to tell customers how much their overdrafts cost through transparent charging have encouraged them to manage their accounts better and stop paying fees.
'Although this has led to a reduction in fee income, as customers increasingly negotiate facilities rather than incur higher fees on unauthorised borrowing, UK branch banking is confident that longer- term benefits will emerge from improved customer relations,' the bank said.
NatWest's profits were struck after charging pounds 159m for the closure and sale of retail banking operations in France and Australia.
The investment banking division, NatWest Markets, nearly doubled its profits to pounds 453m on the back of buoyant market conditions. The recovery in the US subsidiary NatWest Bancorp continued, while the UK side benefited from a 38 per cent cut in bad debt provisions.
In its first year of trading NatWest Life became one of the UK's top 15 life assurance companies measured by volume of new business income, and contributed pounds 60m to group profits.
NatWest proposed a total dividend of 18.5p, up 6 per cent. Key regulatory ratios improved: the total capital ratio strengthened from 9.8 to 10.8 per cent, while the Tier 1 capital ratio rose from 5.2 to 5.7 per cent.
Lord Alexander, chairman of NatWest, said: 'I believe we have begun a period of solid progress which will enable us to achieve steady, real growth in dividends whilst also building capital for well-chosen business development.'
However, the chairman added that progress had been hard-going in UK branch business. There was a welcome return to a profit of pounds 180m, he said, compared to a loss of pounds 137m last time.
'This came entirely through a reduction in provisions. The UK economy is undoubtedly recovering and we expect there to be a further improvement in the level of bad debts this year. We anticipate that lending demand will remain subdued for some time to come.'
Lord Alexander said the bank would continue to manage costs tightly, and that another 4,000 jobs would go this year. Staff numbers have fallen by 17,500 from a peak of 109,000 in 1989.
Derek Wanless, chief executive, said: 'On the longer term, the scope for significant enhancement of productivity remains considerable.'
The Banking Insurance and Finance Union (BIFU) accused NatWest of being more interested in keeping shareholders happy than customers and staff. 'NatWest are shutting branches at the rate of 150 a year - it's an insult to customers in the light of these profit figures,' said a spokesman for the union.
Mr Wanless said he was pleased with the continuing trend away from interest income to fee income, typified by NatWest Home Loans, which last year took 7.7 per cent of total new mortgage lending in the UK. The home loans division lifted its profit from pounds 48m to pounds 132m.
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