Wealth Management’s operating profit increased 30% to £413 million on stronger growth in Coutts UK’s regional franchise and higher customer growth. Income from the Asia-Pacific region rose faster too.

Operating profit at Citizens fell 9% to $2.64 billion despite a 2% increase in number of customer. The quality of credit in this unit remains “high although we have seen impairment losses reverting from the very low levels seen in recent years,” said RBS.

Manufacturing lending remained profitable, but costs rose 1% to £2.91 billion on higher spending in technology and property “to support increased transaction volumes.”

RBS said the acquisition of ABN AMRO in October last year, and its subsequent intergration will save the group €1.60 billion over the next three years, 21% more than originally expected.

From the deal, the bank says “we have identified another €100 million of net revenue benefits in Global Banking & Markets and €200 million in the International Retail businesses, bringing the total for net revenue benefits we expect to achieve in three years to €688 million.”

RBS now expects cumulative benefits of up to €2.3 billion associated with the acquisition of ABN AMRO, compared with initial estimates of €1.7 billion.

“The acquisition of ABN AMRO gives us the ability to accelerate our existing strategies for growth outside the UK, particularly in rapidly expanding markets, while adding complementary product capabilities and customer franchises to our portfolio of businesses,” the bank said.

Credit Market Exposures

At year-end, Royal Bank of Scotland net of hedges and write-downs totaled £2.6 billion to high grade CDOs, which include commercial loan collateral as well as prime and sub-prime mortgage collateral, and £1.3 billion to mezzanine CDOs.

There was also £1.2 billion of exposure to sub-prime mortgages through a trading inventory of
mortgage backed securities and CDOs and £100 million through securitisation residuals.

The Group has £2.2 billion of U.S. Alt-A residential mortgage trading inventory, of which more than 85% is investment grade. Collateralised loan obligation exposures totalled £1.4 billion.

Commercial mortgage exposure, consisting of loans originated for the purposes of securitisation, totalled £8.8 billion at December 31, 2007.

The portfolio consisted predominantly of commercial mortgages originated in Europe. The Group hedges some of its positions with counter-parties including financial guarantors.

RBS said it had £2.5 billion of derivative exposure to financial guarantors.

Earnings Guidance and Share Price Review

Royal Bank of Scotland estimates a difficult 2008, as a result of the on-going problems in the credit markets.

The bank has guided full-year 2008 income to rise 19.2% to £29.85 billion. It expects pre-tax profit to fall 0.3% to £9.6 billion while earnings per share are expected to decline 6.15% to 71.7 pence.

On last week, RBS shares closed down 8 pence at 402 pence and have fallen from 700 pence since March 2007.

In 2007, RBS said it reimbursed £119 million pounds to clients who had complained of being overcharged for running up unauthorised overdrafts, 47% increase on the half-year total of £81 million. UK's biggest lenders - RBS, HBOS, Barclays and Lloyds TSB - refunded a total of £433 million pounds in 2007.