Credit crunch takes bite out of Royal Bank of Scotland profits

The UK's second biggest bank's underlying profits for 2007 were 9% higher than the previous year, in line with City forecasts.

But total write-downs on investments hit by last summer's financial turmoil and the crisis in the US sub-prime mortgage market rose to 2.5 billion, the bank said.

RBS's credit crunch losses totalled 1.6 billion, while write-downs at ABN Amro – the Dutch bank it bought last year – were 900 million.

RBS said its performance was held back by the turmoil in credit markets – which hit results at its investment banking division – although the bank countered the losses with the sale of businesses such as utility Southern Water last year.

Despite a worsening economic environment, the bank said a more cautious approach to lending had seen its overall bad debt losses fall 1% to 1.87 billion.

RBS, which owns the NatWest bank, added that retail banking profits rose 10% to 2.47 billion with deposit balances up 9%.

UK business banking also lifted operating profits 11% to almost 2 billion, offsetting the decline in earnings from investment banking.

Its Citizens banking business – exposed to the faltering US economy – also saw profits fall and bad debt charges more than double, reflecting the impact of a softer housing market and a weaker dollar.

Chief executive Sir Fred Goodwin said prospects for 2008 were "difficult as ever to predict" but added that there was good momentum behind the enlarged bank following the acquisition of ABN Amro.

RBS beat off a rival bid from Barclays to win the battle for ABN Amro last October with a 71 billion euro (54.1 billion) bid and said today it has identified a further 1.6 billion euros (1.2 billion) in cost savings from the deal over the next three years.

There have been concerns in the City that RBS overpaid for the Dutch bank and questions over the bank's capital position following its investment losses.

But the bank added today that its capital remained within target ranges and also cheered investors with a 10% hike in the annual dividend.