Royal Bank of Scotland, the UK bank that was bailed out by the government almost two years ago, said today that tightening margins on deposits helped to cut its wealth division’s operating profit for the six months to 30 June to £143 million ($227.5 million) from £212 million in the same six months a year ago. However, for the entire RBS group, it swung dramatically back into profit from last year's big loss.

For the second quarter ending 30 June, operating profit at the bank's wealth division fell to £81 million from £118 million a year ago, RBS said in a statement. The wealth division includes businesses such as Coutts & Co, Adam & Co and RBS Coutts.

Net interest income at this division fell to £293 million in the first half of 2010 from £334 million in H1 2009.

“Operating profit decreased by 31 per cent reflecting significant margin pressure, particularly on the deposit book. Net interest income fell 15 per cent, with a marked reduction in net interest margin partly offset by growth in client deposit and loan balances,” RBS said in a statement.

Client deposits in the wealth division grew by 3 per cent with increases most evident in the UK as new products attracted funds.  Deposit outflows occurred in the international businesses where competition for private bankers has resulted in client attrition, it said.

However, for RBS as a whole, results have seen a dramatic improvement, a development likely to add pressure on the lender to repay more taxpayer funds.

RBS swung back heavily into the black, with an operating profit totalling £1.582 billion in the first half of 2010, compared with a loss a year ago of £3.354 billion.

Net of restructuring and other non-operating costs, including a £500 million accounting credit related to the Asset Protection Scheme [the UK government bailout programme], profit before tax was £1.157 billion, compared with a loss of £21 million in the first quarter of 2010, the statement said.

Total impairments fell from £2.675 billion in the first quarter of 2010 to £2.487 billion in the second quarter, reflecting gradual strengthening of the global economy, RBS said.

RBS’ Core Tier 1 capital ratio stood at 10.5 per cent at 30 June 2010, compared with 10.6 per cent at 31 March 2010.