By Iain Withers
LONDON (Reuters) -British bank NatWest swung to a hefty profit on the back of the country's economic recovery but said rising prices will make it harder to cut overheads, prompting it to lower its cost-cutting target.
NatWest on Friday reported pretax profit of 4 billion pounds ($5.45 billion) for the 2021 calendar year, compared with a 351 million pound loss in 2020, restated as a 481 million pound loss to exclude its axed Irish business.
Like their European peers, British banks have benefited from a rebound in consumer spending, lower than expected loan defaults and a buoyant housing market since the initial phase of the COVID-19 pandemic.
The improved picture meant NatWest could release 1.3 billion pounds of the reserves built up to deal with soured loans.
It also announced a dividend of 7.5 pence per share and a 750 million pound share buyback.
However, analysts warn that inflation at its highest in nearly 30 years threatens to squeeze household incomes and dampen the recovery.
"We're really aware the challenges are to come for a lot of customers," NatWest Chief Executive Alison Rose told reporters, adding that there had not yet been any increase in calls to the bank's helplines from people struggling to pay their bills.
"People are phoning up and talking about it, but we're not seeing any concerns coming through in our data as yet," she said.
NatWest reduced its annual cost-cutting target to 3% from 4% for each of the next two years, citing inflation pressures and reinvestment.
The higher cost guidance is likely to lead to downgraded consensus forecasts for the bank, analysts at JPMorgan Cazenove said in a note.
NatWest shares were down 2% at 235.4 pence by 1000 GMT.
The pressure on costs was reflected in a 40% leap in the bank's bonus pool to 298 million pounds in 2021. Rose's total pay packet, meanwhile, climbed to 3.6 million pounds from 2.6 million pounds, having previously waived some awards.
The Bank of England's two increases to interest rates in quick succession have broadly improved the outlook for banks because they make money on the difference between rates charged on lending and paid out on deposits.
NatWest said it expects revenue to grow to 11 billion pounds, up from 10.5 billion pounds in 2021.
NatWest is close to ending its 14 years of being majority owned by the state after the group's 2008 financial crisis bailout. A string of stock sales has reduced the government's holding to 51%, with further sales expected within months.
However, NatWest did not escape 2021 without setbacks. Profit was dented by 466 million pounds of litigation and conduct charges, including a 265 million pound fine for failing to prevent the laundering of 365 million pounds, some of it deposited at a branch in bin bags.
The bank's veteran chairman, Howard Davies, told reporters he plans to remain in the role for the "foreseeable future", in response to a media report saying the board was considering replacing him.
"Reports of my death have been much exaggerated," Davies said. "There are no plans for me to leave at present and there is no process under way."
($1 = 0.7340 pounds)
(Reporting by Iain WithersEditing by John O'Donnell and David Goodman)