NatWest struck a note of caution about the effect of inflation on its customers despite reporting first-quarter profits well ahead of analysts’ expectations.

The UK lender said on Friday that pre-tax operating profit in the first three months of the year was £1.2bn, 40 per cent ahead of the previous year and significantly higher than the £755mn City analysts had expected. The figures excluded its Ulster Bank division in the Republic of Ireland, which it is exiting.

Revenue rose 17 per cent to £3bn, also beating consensus forecasts of £2.7bn, driven by mortgage growth, increased consumer spending and rising interest rates.

But shares in the bank were down more than 4 per cent in afternoon trading on Friday, reflecting some caution in the lender’s outlook for the year ahead.

“We’re not seeing any signs of distress in our book,” said chief executive Alison Rose, “but we are well aware of the challenges and concerns that our customers have around the impact of inflation and the disruption of supply chains.”

NatWest said it had referred 2,100 customers to charity Citizens Advice over the past year and had provided advice to 50,000 small business owners on how to deal with rising energy prices.

“For a lot of families and business, they’ve never had to operate in an inflationary environment,” added Rose, while emphasising that many had built up reserves during the pandemic.

Russ Mould, investment research director at AJ Bell, said the market “seems more interested in, and worried by, the bank’s cautious comments on the economic outlook, where the cost of living crisis could start to weigh”.

While further interest rates would boost banks’ earnings, they risked causing more borrowers to fall behind on payments, which could in turn lead to higher loan provisions, he added.

NatWest released £38mn of reserves against potential loan losses, less than the £98mn released in the first quarter of 2021 but significantly better than expected provisions of £105mn.

Concerns about the cost of living are growing as food and energy prices rise, in part because of the war in Ukraine.

Lloyds Banking Group’s chief financial officer William Chalmers said in its first-quarter results on Wednesday that 1.2mn customers had cancelled subscriptions for services such as gyms and streaming content since the summer.

Ian Gordon, banking equity analyst at Investec, said that consensus estimates had failed to fully price in the impact of various decisions on NatWest’s balance sheet strength, leading to some disappointment.

Owing to factors including the buyback of government shares and regulatory changes, NatWest’s common equity tier 1 ratio fell from 18.2 per cent to 15.2 per cent in the first quarter, 40 basis points below consensus.

The bank’s resolution at its annual meeting on Thursday to increase executive pay passed with more than 90 per cent of shareholder votes in favour, despite opposition from proxy adviser Glass Lewis.

The plan will entitle Rose to a maximum bonus 43 per cent higher than her potential payout from the previous year. The lender argued that it was time to bring her pay in line with competitors.

The UK lender in March dropped below 50 per cent government ownership, which its chair Sir Howard Davies described on Thursday as an “important symbolic moment”.

The UK lender bought the shares for 220.5p, significantly below the 502p per share that the government paid in 2008 to bail it out.

NatWest maintained its outlook from its 2021 annual report, although it said expected income for the year would be “comfortably” above £11bn, excluding notable items.