NatWest said its mortgage lending had almost halved at the start of the year as increased competition among lenders forced them to withdraw from parts of the market.
The banking group said new mortgage loans totaled £5.2 billion in the first three months of the year, down from £9.9 billion a year earlier.
NatWest chief executive Paul Thwaite said mortgage demand had fallen throughout 2023, with fewer deals being offered.
“Because the market was relatively thin, there was a lot of price competition, and we made a conscious decision at that point not to compete across the entire segment in the third and second half of the fourth quarter,” he added.
“We wanted to make sure we were getting the right return on the capital we deployed.”
He added that while this accounts for the decline in lending compared to the previous year, mortgage applications have increased by about 25% and the lender's market share has increased to more than 12%.
The group, which also includes Royal Bank of Scotland and Coutts, reported first-quarter pre-tax operating profit of £1.3 billion, down 27% from £1.8 billion a year earlier.
That's ahead of the £1.2 billion in revenue analysts calculated for the quarter.
The bank's total revenue has fallen by a tenth as more customers move money from current accounts to higher-yielding savings accounts.
However, NatWest said customer deposits rose by £2 billion in the first quarter, reflecting an increase in savings and current account balances since the end of 2023.
We also found that despite cost-of-living pressures, the level of borrowers defaulting on their loans remained low.
Mr Thwaite said there were signs that customer sentiment was improving after households were squeezed by cost-of-living pressures in recent years.
“We think the pressure on retail consumers is easing. There is evidence that they are starting to feel more confident, even though they remain in control of their budgets.
“This is mainly due to expectations of lower inflation and the possibility of a Bank of England rate cut.
“But it’s important to strike a balance. There are still some challenges. “The cost of living continues to have an impact on the household budgets of our customers, who will be looking to extend their mortgages and make higher payments.”
These customers are seeing their average monthly repayments increase by around £250, he said.
Mr Thwaite said NatWest was taking the “necessary steps” to prepare to sell the bank's remaining shares to private investors after the government bailed it out during the 2008 financial crisis.
He said decisions about the timing and structure of the sale were a matter for the Treasury, which had previously said a sale could happen as early as the summer.
The government has said it hopes to sell its stake completely by 2025-2026.
Shares in NatWest were up more than 4% on Friday morning.