LONDON (Reuters) - The country's second biggest bank Royal Bank of Scotland Group (RBS) said its 2005 financial performance would meet analysts' expectations, bringing closer the possibility of share buybacks next year.

RBS said on Thursday it expects to report good growth in income for the year, on the back of strength in corporate banking and at its U.S. unit Citizens, while keeping a tight control on costs and generating the expected benefits from recent acquisitions.

But its shares dipped as the update failed to match the upbeat tone of smaller rival HBOS earlier in the week, prompting selling after a rise of over 10 percent since mid-October.

RBS shares initially fell over 2 percent but the loss was trimmed and by 10:30 a.m. they were down 0.4 percent at 1,704 pence to value the company at 54 billion pounds.

"This is delivery on track and if you deliver on track people should see that they're exceptionally cheap shares," said Simon Maughan, analyst at Dresdner Kleinwort Wasserstein.

RBS Chief Executive Fred Goodwin said the bank did not expect to make any acquisitions in the near future and so excess cash could be spent repurchasing its own stock, which cuts the number in issue and in theory boosts the value of the remaining shares.

"We've fulfilled all of our acquisition priorities...as we've been indicating for some time there are no immediate acquisition priorities or opportunities on the landscape," Goodwin told reporters on a conference call.

He said as a result the bank's capital ratio is improving and share buybacks were possible. "Let's wait till we get to that point, but with every day that passes that option becomes closer," he said.

"It was a reiteration of what's been said previously but the language was much more favourably disposed to a return of capital to shareholders, which is what the market wants it to do," Ridland said.

RBS said it expected its tier 1 capital ratio to exceed 7 percent at the end of the year, improving from 6.6 percent at mid-year, reflecting strong capital generation.

RBS has said previously that buybacks are unlikely when the ratio is below 7 percent, but they are possible at between 7 and 8 percent and probable above 8 percent.

"There's been a big theme of returning capital to shareholders and the nearer you come to that stage the more the undervaluation of Royal Bank will be corrected," Ridland said.

Rival HBOS will buy back up to 1 billion pounds of shares this year and another 750 million pounds worth next year. Analysts said RBS could buy back at least that amount annually.

RBS shares are among the lowest rated among major global banks, trading at about 10 times estimated 2005 earnings, compared with the Europe sector average of near 12 times.

Over the past five years, RBS has transformed itself into one of the world's largest players via nearly $60 billion (34 billion pounds) of deals. But investors have been wary that more acquisitions would stretch its finances, despite assurances that no more big deals are on the horizon.

The Edinburgh-based bank said costs related to income for the full year were expected to be similar to the first half, when the ratio was 41.7 percent excluding acquisitions.

But it said net interest margin for 2005 is set to be slightly lower than in the first half, mainly due to proportionally higher growth in large corporate and mortgage lending and because the U.S. yield curve has flattened further.

It said non-interest income, expected to account for over 60 percent of revenues, had been boosted by growth in income from banking fees, financial markets and insurance premiums.

The bank said its total charge for provisions should be in line with market expectations, and Goodwin said "it feels as if we're closer to the peak" of bad debts.

RBS said there were signs that an increase in unsecured personal lending arrears may be levelling off, but said it was too early to conclude that arrears had peaked.

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