1:00AM New York – Royal Bank of Scotland warns of a decline in earnings in fiscal 2008 and increases write-downs related to U.S. subprime loans.

Earnings Review

Royal Bank of Scotland Group, the second largest bank in the U.K, reported Thursday fiscal 2007 income rose 6.4% to £25 billion from £23.5 billion a year earlier despite a growing loss related to the U.S mortgage loans.

The bank, which operates financial groups, Royal Bank of Scotland UK, NatWest, Ulster Bank in Ireland, and Citizens in the U.S, saw write-downs linked to credit crisis in U.S rising to £2.5 billion. Included in the write-downs is a loss of £1.6 billion from the commercial banking unit.

In December, RBS warned of a possible write-off of £1.25 billion pounds linked to the U.S housing market bust.

Impairment losses fell 1% to £1.86 billion from £1.87 million in 2006.

However, RBS’s writedowns, along with other major U.K banks compare favourably with that of peers in the U.S. Last week, Barclays wrote down £1.6 billion worth of investments linked to the risky loans in the U.S.

In the year, Royal Bank of Scotland posted pre-tax profit increase of 8.4% to £9.96 billion compared with £9.19 billion pounds in 2006.

Earnings rose 18.6% to 76.4 pence from 64.4 pence in 2006. Group operating profit, including results from ABN Amro acquired in October rose 9% to £10.3 billion. Write-downs at ABN Amro amounted to £900 million.

RBS said it was increasing its dividend by 10% to 33.2 pence per share from 30.2 pence per share, which was at the top end of analysts’ predictions. Other U.K lenders such as HBOS and Barclays have raised dividends after declaring annual earnings.



For fiscal 2007, RBS said tier 1 capital ratio - a key measure of financial strength - increased to 7.3%, which was within the group’s range of 7% to 8%. Total capital ratio was 11.2%.

Segment Review

Growth in the U.K corporate and retail banking rose faster than all other units, said RBS.

U.K corporate banking achieved operating profit of £1.96 billion, up 11% from prior year. Customers increase by 4%.

The Retail-banking segment posted increase of 10% in operating profit to £2.47 billion led by higher growth in savings and investment assets. Lending to individuals in this division was curtailed.

For fiscal 2007, Global Banking and services reported operating profit of £3.69 billion and wealth division of £413 million. Operating profit at the Citizens rose to £1.32 billion.

RBS said profits from subsidiary Ulster Bank rose 22% to £513 million and fell 9% to £683 million at RBS Insurance. The bank blamed the weaker results to the credit market squeeze. The insurance division suffered claims of £274 million, as a result of U.K. floods in 2007, the wettest in two and half centuries. Outside this, operating profit gained 28%.

At Global Banking & markets dropped 2% £3.68 billion. Volumes at the division rose highest in the first half, and fell in the second half on write-downs linked to the U.S credit market losses.