Royal Bank of Scotland has provided some much needed cheer to the UK banking sector by announcing a 15% increase in profits.

The bank - which also owns NatWest - said pre-tax profits before one-off items for the first six months of the year rose to �3.15bn ($4.86bn), up from �2.75bn a year ago.

But RBS said it had raised the amount of money it had put aside to cover bad or doubtful loans from �367m to �611m.

'Strong income growth and improved efficiency are key factors in these results," said the bank's chairman Sir George Mathewson.

"Overall credit quality remains strong," he added.

'Superior performance'

RBS is the last of the "big four" UK High Street banks to report its half-year results.

So far, Barclays and HSBC have seen profits fall, while Lloyds TSB reported a profits rise of only �1m.

The results have seen banks making big increases in their provisions for bad debt, reflecting the turbulence on the world's financial markets, losses in Argentina, and corporate failures in the US.

But the provisions made by RBS were at the lower end of analysts' forecasts.

"We anticipate continuing with a cautious stance in the short term, however we remain confident in our ability to continue to deliver superior performance for our shareholders," the bank said in a statement.

City reaction

The figures were well received in the City, where analysts at Teather & Greenwood raised their rating on Royal Bank shares to "buy" from "hold".

Investment bank Merrill Lynch maintained its "strong buy" rating on the stock, while BNP Paribas kept an "outperform" recommendation, describing Royal Bank as the "star performer" in the banking sector.

At Rothschild Asset Management, which owns some Royal Bank shares, UK equities director Charles Deptford said: "Their results look better than those of their rivals."

Royal Bank shares surged 66p or 4.3% to 1605p in early trade.

But fears that Spanish bank Santander Central Hispano, hit by losses in Latin America, may sell some of its 8% stake in Royal Bank sent the shares lower in afternoon trade.

The stock closed down 87p, or 5.7%, at 1443p.

Cost savings

RBS bought NatWest in 2000, and the bank said it was continuing to see cost-cutting benefits following the deal.

It said the targets for integration benefits were being met.

In February this year, RBS said it expected its merger with NatWest to yield �5.5bn in profits by the end of 2003.