Sir Fred Goodwin, the chief executive of Royal Bank of Scotland, declared himself out of the City “sin-bin” yesterday as he pleased investors with a dramatic increase in the dividend.

The 25 per cent rise in the total payout was almost twice City expectations, helping RBS shares to the top of the FTSE 100 leaderboard, rising 60p to 2,069p. RBS, which owns Nat-West and is the second-biggest British banking group, reported a 17 per cent increase in 2006 pretax profits to £6.5 billion.

“I think we’re out of the sin-bin,” Sir Fred said in a reference to investor sentiment that started to sour four years ago after RBS’s aggressive pursuit of questionable acquisitions. Asked about possible acquisitions, he said: “I don’t think there’s anything at the moment that seems desirable, doable or affordable.”

The dividend increase was the largest of any bank in this results season. It throws down the gauntlet to HSBC, which is expected to report a modest dividend rise in sterling terms on Monday. Sir Fred described the new dividend level of 90.6p a share as “something [the investors] can look forward to in perpetuity”, but he qualified this later by saying that it was not guaranteed.

However, RBS said it believed that it had never cut the dividend, certainly not in the past 25 years. Even after the leap in the shares yesterday, they yield 4.4 per cent.

Investors welcomed the fortified payout. RBS has lifted the proportion of after-tax profits paid out in dividends from 37 per cent to 45 per cent in two years.

Edward Bonham-Carter, the chief executive of Jupiter Asset Management, a big RBS investor, said: “Fred’s listening to the market, concentrating on organic growth and returning value to shareholders.”

RBS said that shareholders had signalled a clear preference for higher dividends over share buybacks. Therefore, further buybacks, along the lines of the £1 billion buyback of last year, were less likely.

Strong performances in corporate lending and wealth management were behind the lift in RBS profits. The retail bank was kept to a 2 per cent rise in profits to £2.3 billion because of borrower defaults. Total bad debts worsened from £1.71 billion to £1.88 billion but the deterioration in the UK slowed in the second half. Credit card arrears stabilised and the increase on arrears on personal loans slowed.

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