A promise to spend up to £1 billion buying back stock this year with a 29 per cent increase in the final dividend sent the lacklustre shares in the Royal Bank of Scotland ablaze yesterday in a nervous stock market.

They finished 50p higher at 1909p after earlier touching 1949p. Full-year profits of £7,936 billion, 21 per cent up on 2004 were in line with City expectations as was a return on equity of 18.2 per cent. The bank said 42 per cent of this profit was earned overseas.

The surprise was the Royal Bank's move to return so much of the capital it has generated to shareholders, although Sir Fred Goodwin, chief executive, said this was in line with his previous indications.

He also stressed that final pay-out of 53.1p a share was worth more than a one-off special dividend because it established a base for future payments.

It raises the year's total by 25 per cent to 72.5p, giving the shares a yield of 3.8 per cent.

The bank's 113,000 employees based around the UK, who participate in the company profits share scheme will split a bonus of £232 million - equivalent to £2,100 per person.

Commenting on City fears the Royal Bank, owner of NatWest, might spend surplus capital on an over-priced acquisition, Sir George Mathewson, who retires as chairman in April after 24 years, said: "The worst thing you can do to a business is to give it too much money."

The Royal Bank escaped the surge in bad and doubtful debts reported by some rivals by concentrating on mortgages and corporate lending where returns are lower, but so is the risk of a default.

"Impairment" losses from bad and doubtful debts rose by seven per cent to £1.7 billion, but fell marginally as a percentage of loans and advances to 0.46 per cent Sir Fred said it scaled back marketing of credit cards last year, concentrating on existing customers it already knows rather than sending out random direct mail shots.

"We haven't run out of ambition or growth," he said. "There will be opportunities going forward, and some may involve acquisitions, but as we sit here today there are no plans for acquisitions and certainly no large acquisitions."

The Royal Bank, he added, does not plan to increase its stake in the Bank of China after it made a $1.6 billion investment last August.

"We view that level as the ticket to the game," he said.

Overall, the bank's income rose by 14 per cent to £25.57 billion, fuelled by corporate banking and a 47 per cent gain to £1.575 billion in operating profits from US subsidiary Citizens, boosted by its acquisition of Charter One. Ulster Bank turned in a 15 per cent improvement to £530 million, helped by vigorous corporate lending in the Irish Republic.

Costs as a percentage of income remained steady at 41.8 per cent.

Non-interest income now accounted for 61 per cent of that across the group, and profits from the corporate markets division jumped by 24 per cent to £5.22 billion.

Profits from insurance - the Royal Bank owns Direct Line as well as Churchill, acquired in September, 2003 - rose by five per cent to £926 million.

Operating profits from retail banking were four per cent higher at £4.2 billion.

Sir Fred claimed the Royal Bank attracted more new customers from other banks last year than rivals. ..SUPL: