Record profits for RBS as it bucks bad debt trend

The Royal Bank of Scotland is expected to make record profits in 2006 of more than £9bn and may generate enough excess capital to consider buying back more shares, or raising its dividend in 2007.

The Edinburgh-based bank was one of the fastest risers in the FTSE 100 after demonstrating it had avoided the pitfall of too many customers applying for individual voluntary arrangements (IVAs) to protect themselves from creditors.

In stark contrast to HSBC, which issued a downbeat trading statement and complained about IVAs, Sir Fred Goodwin, RBS chief executive, said: "IVAs, if used properly, can be to everyone's advantage". He was asked why RBS appeared to be having such a different experience on bad debt. He suggested it might be because the bank avoided lending to the "sub prime" sector - those who are not traditionally targeted by banks.

In the first half of 2006, RBS reported a 19% increase in its bad debt charge, but analysts are expecting that to slow in the second half to 14%. "If things stay as they are, the end is in sight," he said.

In yesterday's trading update, ahead of its financial year end on December 31, RBS indicated it would be increasing the cost of insurance - such as for cars - because claims on policies continued to rise. RBS owns Direct Line and Churchill. Its corporate banking division - one of the biggest arrangers of loans for major businesses - is "achieving strong growth", while the US operation, Citizens,.....continued below

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is affected by the weaker dollar.

The bank conducted its first-ever share buy-back in 2006 of £1bn, to boost its shares which have been held back by concerns that extra cash would be used for major acquisitions. Finance director Guy Whittaker said the board would decide what "the appropriate dividends and additional capital actions" should be.

James Eden, an analyst at investment bank Dresdner Kleinwort, who has urged Sir Fred to boost returns to shareholders, insisted there was "management discount in the share price".

Guardian Unlimited © Guardian News and Media Limited 2006