Feb. 28 (Bloomberg) -- Royal Bank of Scotland Group Plc, the U.K.'s second-biggest bank, reported a 16 percent increase in second-half profit on gains at its domestic retail and corporate units and the sale of a stake in Southern Water Capital Ltd.

Net income climbed to 3.75 billion pounds ($7.42 billion), or 38.4 pence a share, based on full-year figures released by the Edinburgh-based company today. The acquisition of ABN Amro Holding NV pushed up RBS's credit-related writedowns by almost 1 billion pounds to about 2.5 billion pounds.

Chief Executive Officer Fred Goodwin told analysts on a conference call today that the ABN Amro acquisition gives RBS ``significant opportunities'' in Asia and investment banking amid a slowdown in the U.S. U.K. banks including HBOS Plc, the country's largest mortgage lender, reported declines in earnings after higher borrowing costs sparked by the U.S. subprime mortgage crisis helped slow loan growth.

RBS has ``significantly hiked the write-offs and addressed the weaknesses in ABN Amro that everybody has been worrying about,'' said Simon Maughan, a London-based analyst at MF Global Securities Ltd. who has a ``neutral'' rating on the stock.

RBS fell 8 pence, or 2 percent, to 402 pence in London trading. The stock has lost 9.5 percent this year amid speculation the company would need to make a larger writedown or have a rights offer to strengthen its capital.

Assets sales boosted income after the bank gained 1.2 billion pounds on the sale of its Southern Water stake, its holding in London Stock Exchange Group Plc and Mastercard Inc., and other assets including property.

Beats Estimates

Second-half profit beat the 3.29 billion-pound median estimate of 10 analysts surveyed by Bloomberg. Full-year earnings rose 18 percent to 7.3 billion pounds. That beat the 6.84 billion-pound median estimate. RBS sold the Southern Water unit to JPMorgan Chase & Co. and a group of investors.

RBS raised its dividend 10 percent to 33.2 pence, joining Barclays Plc, Lloyds TSB Group Plc and HBOS Plc in increasing payouts to shareholders. Alliance & Leicester Plc said it would hold its dividend and curtail lending because of higher borrowing costs.

``Whilst the future seems as difficult as ever to predict, it's clear that we enter 2008 with real momentum behind our organic growth,'' Goodwin said in a statement. The bank is seeing ``tentative signs'' credit markets are improving, he said.

RBS won't sell its Angel Trains leasing company until it gets a ``good price,'' and there may be other ``odds and ends'' sold this year, Goodwin said.

Capital Needs

The bank's Tier 1 ratio, a measure of capital strength, was 7.3 percent, within its target range of 7 percent to 8 percent and core Tier 1, which excludes preference shares, was 4.5 percent.

``There are no plans for inorganic capital raising or anything of that sort,'' Goodwin said. ``RBS historically generated a lot of capital and cash and the businesses we have acquired will help that process,'' he said.

In December RBS said writedowns on securities linked to U.S. subprime mortgages would amount to 1.5 billion pounds.

``We may have to wait several years to see if ABN Amro delivers shareholder value,'' said Howard Wheeldon, an analyst at BGC Partners in London. ``I wouldn't like to see any further acquisitions.''

Full-year pretax profit rose 7.8 percent to 9.9 billion pounds, as profit in U.K. corporate banking climbed 11 percent to 1.96 billion pounds on an increase in customers. Profit at global banking and markets fell 2.4 percent to 3.69 billion pounds. Retail banking profit climbed 9.8 percent to 2.47 billion pounds, helped by an 8.7 percent decline in customer bad debts.

U.S. Unit

The Citizens unit in the U.S., hurt by an 88 percent increase in bad loans, reported a 17 percent drop in pretax operating profit. ``It will remain a mixed picture in the U.S.,'' Goodwin said.

Wealth management, insurance and Ulster Bank accounted for the rest of RBS's earnings.

RBS wrote down 1.62 billion pounds after cost reductions of 275 million pounds. The bank said it also wrote off 978 million pounds of ABN Amro's credit-related assets.

The bank said it wrote down 659 million pounds in collateralized debt obligations, 495 million pounds in traded securities, 456 million pounds in assets guaranteed by bond insurers and 285 million pounds in leveraged loan assets.

January Trading

RBS ``had an excellent trading month in January notwithstanding the general market conditions,'' RBS's corporate banking head Johnny Cameron said in a conference call with analysts. There have been ``substantial deals'' lending to investment-grade businesses and some small and medium-sized leveraged loans. Securitizations have been ``extremely quiet,'' he said.

The Scottish bank said it made a ``strong start'' in integrating the Asia and investment banking units of the No. 1 Dutch lender. The bank increased targets for revenue gains and cost savings on the purchase to 2.3 billion euros ($3.5 billion) from 1.7 billion euros by 2010, it said. RBS negotiated to obtain ABN Amro's private bank unit in India from bidding partner Fortis earlier this month.

RBS has said it may get regulator approval for the plan next month from the Dutch regulator on its plan to split ABN Amro between itself and Santander and Fortis. RBS's portion of ABN Amro cost it 14.3 billion euros rather than the 16.1 billion euros it originally forecast, helped by the sale of ABN Amro's Brazil investment banking unit to Santander for 750 million euros, Goodwin said.

RBS has appointed 150 senior management positions at the bank's enlarged corporate banking arm. RBS will sell certain Asia retail businesses as it pursues ``critical mass'' in the region and expects revenue to top one billion pounds this year.

Asian Growth

The ABN Amro acquisition gives RBS consumer banking businesses in China, Taiwan, Hong Kong, India, Pakistan, Singapore, Indonesia and Malaysia. The bank has about 1,200 staff in China in addition to its joint venture with Bank of China Ltd. It employs 9,000 staff in India, half of which work on the bank's processing systems.

The bank's cost-income ratio, which measures expenses as a proportion of revenue, declined to 40.7 percent from 42.1 percent excluding its ABN Amro units. Its net interest margin, the difference between loan revenue and interest costs, was little changed at 2.46 percent.

Barclays said last week profit fell 21 percent. HBOS said yesterday six-month earnings declined 8.9 percent.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net; Jon Menon in London jmenon1@bloomberg.net.

Last Updated: February 28, 2008 12:11 EST