Royal Bank of Scotland shares soar after pre-tax profits rise 19 per cent

Year 2000 costs and losses on supermarket banking did not affect City reaction to the Royal Bank of Scotland's figures yesterday. Shares in the bank soared after it announced bumper annual profits. Lea Paterson reports.

Royal Bank of Scotland, which yesterday reported a strong performance across all principal businesses, took the opportunity to quash recent speculation that it could be taken over by rival bank Abbey National. George Mathewson, Royal Bank's chief executive, said: "We are not in discussions with Abbey. We do not feel under the threat of takeover at all."

Royal Bank said yesterday that, before exceptional items, pre-tax profits rose by 19 per cent to pounds 768m in the year to September. After exceptional items, which included a pounds 29m provision for the year 2000 and gains from the sale of a minority stake in Banesto, pre-tax profits were up 15 per cent to pounds 801m.

Heavy start-up costs for the bank's new retail businesses, including a 50/50 joint venture with Tesco, failed to affect sentiment. Tesco Personal Finance, which began trading in July, lost pounds 11m. But the bank defended the deficit, saying the link-up had been "embarrassingly successful".

Almost 400,000 customers, including 195,000 deposit holders and 140,000 holders of Tesco's ClubCard Plus loyalty card, have signed up to Tesco Personal Finance since launch. Early difficulties experienced by Tesco account holders were due to larger-than-anticipated volumes and were now largely resolved, the bank said.

In aggregate, the bank's new retail businesses, which include a stake in the Virgin One bank account, knocked pounds 27m from the bottom line last year. Mr Mathewson said that initial losses on these businesses were "almost inevitable, because of start-up and acquisition costs". The new retail businesses are expected to break even in 1999 and to start generating profit in 2000.

Following news of the figures, which beat most City expectations, shares in the bank rose sharply. Shares closed at 685p, 12p up on the day.

Direct Line, Royal Bank's insurance company, performed better than many analysts predicted. In a climate of cut-throat competition in the UK insurance market, Direct Line's pre-tax profits grew by 37 per cent to pounds 36.2m. The bank said that Direct Line's "competitive strengths - its brand, cost control and economies of scale", contributed to the insurer's performance.

Around 16,000 bank employees stand to receive an annual bonus equal to 9.5 per cent of salary.

The final dividend will be 15.2p a share. With the interim dividend of 6.2p, this gives a total for the year of 21.4p.