UPDATE: RBS Profit Grows 19%, Led By Investment Banking Arm

August 08, 2007, 1:15 a.m. EDT 3 Min Read

LONDON (Dow Jones) -- Royal Bank of Scotland Group reported a 19% rise inprofit Friday, topping expectations after strong growth from its corporate andinvestment banking division, though insurance losses and continued tough U.S.markets took some of the shine off results.

RBSsaid net profit for the first six months of the year rose to 3.56 billionpounds ( $7.23 billion) from 2.98 billion pounds as total income rose 7.7% to14.69 billion pounds.

Operating profit for the period rose 11% to 5.1 billion pounds, slightly aheadof expectations after the bank had previously indicated that operating profitwould be around 5 billion pounds.

Stripping out goodwill payments and losses related to flooding in the U.K.,operating profit would have been around 4% ahead of expectations, said AlexPotter, an analyst at Collins Stewart.

RBS said it would raise its interim dividend by 25% to 10.1 pence a share.

Shares in RBS, the U.K.'s second-biggest bank by market capitalization, lost1.3% in a broadly lower London market, having traded around 1% higher early inthe session.

Growth was driven by RBS' corporate and investment banking division, whereprofit rose 16% to 3.15 billion pounds due to strong asset growth in WesternEurope and Asia and improved earnings from trading foreign exchange andinterest-rate derivatives.

The result mirrored the recent performance of several other European banks,including Barclays (BCS) and Credit Suisse (CS) , which have largely shruggedoff worries over the subprime and leveraged debt markets to report stronginvestment banking growth.

Johnny Cameron, CEO of global markets, said the group had cut back a lot ofits exposure to markets such as leveraged financing and subprime mortgages. Headded that its exposure was already "very modest" even before it scaled backfurther.

The bank's results in July were also ahead of a year ago, said Cameron, whoechoed comments from Barclays' Bob Diamond on Thursday by noting that foreignexchange trading volumes have been particularly strong in the latest month.

"We're seeing some very good business coming out of the volatility," Camerontold analysts.

RBS is leading a consortium that is battling Barclays for control of Dutchrival ABN Amro (ABN) , but it didn't provide any update on its bid.

Operating profit for the group's retail division grew 7% to 1.16 billionpounds, helped by tight cost controls and a fall in bad debt charges as the bankkept its cautious approach to unsecured lending.

Wealth management saw the biggest growth in profit, rising 28% to 202 millionpounds after its Coutts private banking network grew the number of customers inthe Asia-Pacific region by around 20%.

U.S. competition remains tough

RBS' U.S. Citizens Financial arm, which has been struggling against lowerretail deposit and lending volumes, saw profit fall 7% to 752 million pounds.But the bank said this was largely due to exchange rate effects and the overallpicture for the unit is improving.

Collins Stewart's Potter, however, said even ignoring the exchange rateimpact, results for the unit were around 6% below forecasts.

Lawrence Fish, chairman of Citizens, said he believes the worst is over forthe division, but conceded that competition remains fierce.

"The competitive environment for deposits in the states is very difficult.Until the recent move in stock markets, financial assets had looked a lot betterthan deposits," Fish told analysts.

"The volume isn't big and the pricing is very tough," he added.

On the positive side, RBS reiterated that Citizens doesn't have any exposureto the subprime market.

At the group's insurance division, profit fell 27% to 255 million pounds asthe bank faced a 125 million pound clean-up bill from the floods that swept thenorth of England in June.

RBS expects further flooding in the south of the country during July to have asimilar impact on the insurance group's second-half results, said Guy Whittaker,group finance director.