LONDON  - NatWest has bought a 2.4 billion pound ($3.09 billion) mortgage book from smaller rival Metro Bank and upgraded its performance outlook for the year, boosting its shares even though the British bank's first-half operating profit fell 16%.

For NatWest, the Metro Bank deal represents a bid to grow scale in retail banking, as cut-throat competition for mortgage business among British banks eats into their margins.

For Metro Bank, it represents a much needed injection of cash.

NatWest shares jumped 8% on Friday to their highest level since February 2015. Metro Bank climbed 5% in early trade.

NatWest's fall in first-half profit to 3 billion pounds was slightly less than expected by analysts, and came as British banks grapple with intense mortgage market competition and savers shifting deposits to higher-paying products.

The bank raised its 2024 forecast for return on tangible equity to above 14%, from the 12% expected previously in a sign of its confidence in its performance for the rest of the year.

Income for the year is expected to reach about 14 billion pounds, up from an earlier forecast of between 13 billion and 13.5 billion pounds.

The results followed a similar update from rival Lloyds Banking Group on Thursday, which reported a 14% fall in first-half profit but offered signs of optimism for the economic outlook in the second half.

"Our customers are beginning to feel more confident, with activity increasing and asset quality remaining strong, and we are well positioned to help unlock growth across the UK through our unrivalled regional network," NatWest CEO Paul Thwaite said on Friday.

The British bank said this month that the government's stake in it fell below 20%, moving the lender closer to full private ownership after its state bailout in the 2008 financial crisis.

 

METRO DEAL

Analysts were positive on the Metro Bank deal.

"The acquisition of 2.5 billion pounds worth of prime mortgages from Metro Bank suggests inorganic loan book growth is on the table," said Matt Britzman, analyst at Hargreaves Lansdown.

"NatWest is poised to benefit from many of the sector's positive trends," Britzman said.

Metro Bank, launched to challenge the dominance of the country's big banks in the wake of the global financial crisis, struck a 925-million-pound rescue deal last year after suffering heavy deposit outflows.

The mid-sized bank has battled to make enough profit to reach scale in a market dominated by incumbents with access to cheaper funding.

Poor market conditions last year had forced Metro Bank to abandon the sale of the mortgage portfolio in December. It revived plans to sell it in recent months as it tries to refashion itself as a specialist lender focusing on niche and under-served markets. ($1 = 0.7774 pounds)

(Reporting by Lawrence White, Yadarisa Shabong and Carolyn Cohn Editing by David Goodman and Jane Merriman)