Royal Bank of Scotland, Britain's second biggest bank that is locked in a takeover battle for ABN AMRO, beat expectations with an 11 percent rise in profit and lifted its dividend by 25 percent.

RBS said on Friday its underlying operating profit in the six months to the end of June was 5.1 billion pounds ($10.4 billion), up from 4.6 billion a year before and an average forecast of 5.04 billion pounds in a Reuters Estimates poll of four analysts.

The bank said income grew 8 percent to 14.7 billion pounds and costs as a percentage of revenue improved to 41.4 percent from 41.9 percent.

Profits in its U.S. banking arm Citizens fell 7 percent in sterling terms to 752 million pounds, but operating profit was up 2 percent before the impact of the weak dollar.

Insurance profits fell 27 percent to 255 million pounds, as the unit suffered a net impact of 125 million pounds from claims related to floods across Britain in June.

Growth was led by Global Banking & Markets, RBS's investment banking business, where profits jumped 19 percent to 2.2 billion pounds.

RBS said bad debts in the first half were 871 million pounds, down two percent on the year, and it said it had passed the peak of bad debts on UK unsecured loans.

Its group net interest margin slipped to 2.42 percent in the first half, from 2.45 percent a year earlier.