The Royal Bank of Scotland (RBS) has announced a sharp rise in half-year profits to �2.07bn, up from $1.5bn in the previous year.

The figure was up 37%, excluding one-off charges, though comparisons are complicated by the bank's purchase of NatWest last year, which swelled its business.

The company has set aside a larger than expected �367m to cover bad debts, up 19%, or an increase of �83m.

The chairman, Sir George Mathewson, said that the provisions had risen largely because of an increase in the bank's lending but the credit quality remained "strong in absolute terms".

NatWest integration

RBS said the integration of NatWest was "fully on track" and had cost �361m in the first half of the year generating $106m in profits.

The cost cutting included eliminating 16,000 jobs out of an estimated 18,000 it aimed to cut by March 2003.

The key test for the cost benefits of the takeover is expected to come later this year when RBS starts the integration of NatWest's computer systems.

Chief executive Fred Goodwin said there would be no big deals in the next half while the bank's latest purchase - the retail arm of US bank Mellon Financial - is integrated, but a small acquisition in European acquisition may be made.

RBS gave an indication that it would report healthy results last month when it announced plans to buy Mellon for $2.1bn in cash.

Economic outlook

The general economic outlook was given a cautious forecast by the bank.

"Clearly we are faced with a wide range of economic scenarios," said chairman George Mathewson in a statement.

"We consider that it would be inadvisable for us to assume that any one outlook will prevail," he said.

Shares in Royal Bank have gained 4% this year, outperforming the UK bank sector average by about 9%.

On Tuesday its shares made miniscule gains after the results, rising 2p to 1,642 by 0750 GMT.

The stock was held back by concerns over the larger than expected bad debt provisions, according to traders.