LONDON Royal Bank of Scotland said it would reap more benefits from its purchase of parts of ABN AMRO and beat profit forecasts after unveiling a smaller- than-expected $2.5 billion writedown due to the credit crunch.
Shares in RBS, Britain's second-biggest bank, jumped over 8 percent on Thursday after it said 2007 profit will top 10 billion pounds ($20.4 billion) and its reassurance boosted other UK banks.
Bank shares have been battered in recent months as lenders including Citigroup and Barclays have written off over $50 billion, due to a fall in the value of assets, and on fears that growth could slow sharply next year.
RBS said asset writedowns would total 1.25 billion pounds, including 950 million pounds for its investment banking unit and 300 million pounds for the ABN units it bought in October.
Excluding ABN, RBS said its 2007 profit would be "well ahead" of analysts' average forecast of 9.8 billion pounds, including the impact of the writedowns and gains on planned disposals, notably Southern Water. Results would still be "comfortably ahead" excluding the one-off items.
"2007 hasn't been a barrel of laughs for many of our businesses, yet we're delivering these results," said RBS Chief Executive Fred Goodwin.
Its shares had tumbled over 25 percent since mid-year on fears it faced a big writedown, it had bought ABN's wholesale bank just as capital markets slowed, its U.S. and UK retail banks face stiff headwinds and it faced pressure on capital.
Bruce Packard, analyst at Pali International, said the update had "knocked quite a few of the worries on the head".
RBS said its capital ratios at the end of this year are expected to be comfortably within its 7-8 percent target range for tier 1 capital.
Its funding and liquidity position remained "strong".
Growth at global banking and markets (GBM), the investment bank unit that contributed over 40 percent of group profit in the first half of the year, had slowed in the second half amid turmoil in credit markets, but the unit would report good underlying income and profit growth for 2007, RBS said.
"The key thing, putting aside the writedowns, is that global banking and markets and corporate banking is powering ahead. That's quite a relief," said Mike Trippitt, analyst at Oriel Securities.
"The entire world is so fixated on these writedowns, but the world is continuing to function -- corporates are still growing and loan quality is pretty good."
By 1104 GMT, RBS shares were up 8.6 percent at 506 pence.
ABN AHEAD, WRITEDOWN RELIEF
RBS led a consortium that purchased Dutch bank ABN for 71 billion euros, the world's biggest bank takeover. RBS will get ABN's wholesale business and Asian operations.
In its first update on ABN, RBS said the integration was going well.
The acquisition should deliver slightly higher earnings accretion and return on investment than previously expected. A bigger presence in fast-growing Asian markets and some steady businesses such as ABN's transaction services also left RBS more resilient to an economic slowdown, Goodwin said.
The Edinburgh-based lender's writedowns are largely due to its strong position in collateralized debt obligations (CDOs), where mortgage-backed securities are packaged and sold on to investors. A collapse in the U.S. subprime housing market has cut the value of the CDOs.
RBS said an additional 250 million pound writedown on its leveraged finance portfolio had been offset by a gain of the same amount as a widening of credit spreads had reduced the carrying value of debt held on its balance sheet.
Goodwin said the writedown captured what he expects the total loss will be and included an allowance for further deterioration. There would only be another writedown "if the future trajectory of delinquency got materially worse from where it is now."
Analysts had forecast RBS would mark down its assets by between 1.5 billion and 1.9 billion pounds.
Goodwin told reporters on a conference call that previous guidance on its dividend still stood -- it has said it expects its dividend payout ratio to be near 45 percent.
RBS raised its final dividend by 25 percent in 2005 and 2006, but the ABN deal and credit market turmoil has put pressure on its capital and could limit dividend growth in the next few years, analysts have said.
RBS was expected to report a 2007 underlying pretax profit of 9.86 billion pounds, based on the average from a Reuters Estimates poll of 12 analysts, up from 9.41 billion in 2006.
(Editing by Will Waterman and Erica Billingham)