By Lawrence White

LONDON (Reuters) - NatWest reported a 26% rise in third-quarter profit and raised its income forecast for 2024, as it grew lending and deposits while sustaining margins despite an uncertain UK economic outlook.

The stronger-than-expected results from NatWest on Friday capped a stellar run of earnings from British banks this week, showing them maintaining recent robust revenue levels despite policy interest rate cuts that should eat into loan margins.

Analysts said the bank also managed to stem deposit outflows, a trend seen among lenders in recent quarters as savers looked for higher-returning products, in turn squeezing banks' margins.

"NatWest is also the third bank this week to mention easing deposit migration, and that’s the key reason it posted a decent beat on net interest margin," said Matt Britzman, senior equity analyst, Hargreaves Lansdown.

Customer deposits grew 2.2 billion pounds in the third quarter, NatWest said, up to 427.4 billion pounds, while loans grew 8.6 billion pounds.

The British bank reported pretax operating profit for the July-September period of 1.7 billion pounds ($2.20 billion), up from 1.3 billion a year earlier and beating the 1.5 billion expected by analysts.

NatWest shares rose 4.5% on Friday morning, against a flat FTSE index.

The bank is moving steadily towards a full exit from state ownership following its bailout in the 2008 crisis, with the government's stake falling below 16% as of this month.

NatWest said it now expects to achieve a return on tangible equity greater than 15% this year, up from a previous forecast of 14%.

NatWest's results were stronger than its biggest rival Lloyds Banking Group, which on Wednesday narrowly beat expectations for third-quarter profit.

In common with rival Barclays, NatWest raised its income forecast for the year in response to slower than expected interest rate cuts, now saying it will now reach 14.4 billion pounds from a previous estimate of 14 billion.

STARK CHOICES

NatWest in July announced it would buy a 2.4 billion pound mortgage portfolio from smaller rival Metro Bank, seeking to expand its loan books.

The move, alongside the bank upgrading its performance outlook for the year on Friday, showed CEO Paul Thwaite's confidence despite a mixed British economic backdrop in which growth has been slower than expected.

A measure of the stark choices facing Britain's new left-leaning Labour government will be revealed on Oct. 30 when finance minister Rachel Reeves will deliver her first budget.

She will attempt to boost investment in ailing public services without spooking investors about the size of the gap in public finances, which the independent Office for Budget Responsibility has forecast will rise to 87 billion pounds in 2024-2025.