A healthier loan book drove higher second-quarter profits at Royal Bank of Scotland , echoing a pattern set by rivals' results this week, and the bailed-out group said its revival plan was on track.

Europe's top banks, such as HSBC , BNP Paribas and Barclays , all posted bumper profits on the back of lower bad debt charges, although their underlying prospects remain a concern for some investors.

RBS, which is 83 percent state-owned, posted an operating profit of 869 million pounds ($1.38 billion) for the quarter ending June 30, compared to its first quarter operating profit of 713 million pounds.

RBS shares were up around 2 percent in early trade, outperforming a 0.3 percent gain in the DJ Stoxx European banking index <.SX7P> and a 0.5 percent increase in Britain's blue-chip FTSE 100 index <.FTSE>.

RBS is on track for the demanding rebuilding and restructuring targets for our recovery plan, Chief Executive Stephen Hester told reporters on a conference call.

The company's impairment losses fell to 2.49 billion pounds from 2.68 billion in the first quarter, reflecting a strengthening of the global economy.

Excluding gains on the value of its own debt the operating profit was 250 million pounds, down from the first quarter.

RBS said it was on track to meet its targets, which include plans to sell billions of pounds worth non-core assets as part a restructuring after being bailed out by the government in 2008.

RBS recently sold over 300 UK branches to Spanish rival Santander for 1.65 billion pounds and is expected to confirm the sale of payment-processing unit WorldPay to private equity firms Advent International and Bain Capital for between 2 billion and 2.5 billion pounds later on Friday.

Asked about WorldPay, Hester said he expected to provide further news about the bank's disposal programme on Friday.

Chief Executive Stephen Hester is shrinking the bank's balance sheet after an aggressive expansion by predecessor Fred Goodwin over the previous decade, which stretched the group's finances and led RBS to be bailed out during the credit crisis.

RBS had to be rescued by the British government in October 2008 after its finances were stretched by its part in the acquisition of Dutch bank ABN AMRO in 2007.


RBS's core retail and commercial banking business posted higher revenues during the quarter, but its GBM investment banking division had a more difficult time, with revenues falling 31 percent from the first quarter.

The performance on GBM was a little light, but on the plus side, UK retail banking looked good, said Joseph Dickerson, an analyst at London brokerage Execution.

RBS said there had been no pick-up in July, raising concerns that if a slow May and June continues it would leave many investment banks falling short of 2010 expectations.

July was broadly consistent with the trends we have seen in the previous two months, Hester said. If clients are uncertain and sit on their hands you make less money in investment banking.

($1=.6318 Pound)

(Additional reporting by Steve Slater; editing by Simon Jessop)