Netherlands-based Rabobank has raised its stake in Eureko, the parent of Irish insurer, Friends First, to 37 per cent from 5 per cent. Under the terms of a deal announced yesterday, Rabo's insurance arm, Interpolis, will merge with Eureko's operating company, Achmea.

Rabo will get 32 per cent of Eureko as payment, bringing its total stake to 37 per cent.

The merger will create the Netherlands' biggest insurer, with premium income of €10.2 billion and net earnings of €705 million.

The news came as Rabobank announced yesterday that its net profit rose to €941 million in the first half of the year as strong fee income and solid investment revenue from its insurance operation made up for a lacklustre 2 per cent increase in lending income.

Chairman Bert Heemskerk said he expected a limited increase in revenue over the rest of the year as tough competition in the domestic mortgage market, a flat yield curve and low interest rates meant that profit margins on loans were shrinking.

Nonetheless, he expected to maintain at least 12 per cent net profit growth for the year because Rabobank intended to keep total costs at the same level as 2004.

"Even if the revenues do not increase as fast because of tight interest margins, we have stabilised costs and hope to achieve at least 12 per cent profit growth for the year as a whole," he said.

Mr Heemskerk said despite stiff competition in the mortgage market, Rabobank, with assets of about €510 billion, would cut prices to remain market leader.

Its group revenues rose 5 per cent to €5.1 billion and costs fell 1 per cent to €3.41 billion. Provision for bad debts rose 45 per cent to €249 million.

Rabobank operates the online Rabodirect bank in the Republic.