PROVIDENCE — Turmoil in the real estate and credit markets is straining Citizens Financial Group, the bank’s parent company, Royal Bank of Scotland, said yesterday.

In all, operating profit at Citizens dropped 9 percent last year, to $2.65 billion. Steep devaluation of the U.S. dollar made that decrease even more painful for RBS; net income was down 16 percent after being converted to British pounds.

In announcing its 2007 earnings, RBS said the sputtering U.S. economy was slowing the growth of Providence-based Citizens.

“Against a weaker economic backdrop in the U.S., Citizens, whilst performing well relative to its peers, experienced testing conditions,” RBS said in its earnings report. “Market conditions remain difficult,” it said, “and we continue to respond to challenging income prospects with tight cost control.”

Citizens, acquired in 1988, has traditionally delivered robust profits for RBS.

In 2006, however, revenues were relatively flat. After that performance, RBS reorganized its North American operations, replacing Lawrence K. Fish as chief executive officer of Citizens last March and recruiting Ellen Alemany to oversee all North American activities as CEO of a new organizational unit, RBS America.

RBS appointed Fish chairman of RBS America. But in December, he told employees that he was giving up his remaining operational responsibilities. (Stephen D. Steinour replaced Fish as Citizens’ CEO.)

So far, it appears that those changes have not done enough to insulate Citizens from the problems plaguing the country’s financial sector.

In the past, Fish has said that Citizens dodged most of the damage caused by the collapse of the subprime-mortgage market. In its annual results report yesterday, RBS said that on average, the quality of credit in Citizens’ portfolio remains “high.”

Still, impairment losses at Citizens grew, from 0.31 percent of loans, to 0.60 percent last year. Those losses contributed to a 6-percent drop in revenue, after the conversion to pounds. Impairment losses include write-offs and the building of cash reserves to cover future loan losses.

To compensate for losses related to the subprime-lending crisis, RBS said Citizens “intensified cost discipline.”

As of November, Citizens had 5,400 employees in Rhode Island, more than in any other part of the country. Citizens operates in 13 states, and it had 24,500 U.S.-based employees late last year.

Employment is largely unchanged since then, spokeswoman Kathy O’Donnell said yesterday.

U.S. operations were not all bad news for Scotland-based RBS. Citizens, the ninth-largest bank in the country, grew its consumer-banking customer base by 2 percent last year. Boosted by higher fees, it saw total revenue, in dollars, grow by 2 percent, to $6.24 billion.

Average loans increased by 4 percent in 2007, despite “close attention being paid to our risk appetite,” RBS said. Average customer deposits rose by 1 percent. Citizens increased its credit-card customer base by 20 percent. And earnings from corporate and commercial lending jumped by 13 percent.

Overall, RBS reported an 18-percent rise in net income in 2007. Revenue rose 11 percent, and profits reached $14.5 billion.

Emphasizing the recent acquisition of ABN Amro Holding NV, the giant Dutch bank, RBS CEO Fred Goodwin said he was optimistic about this year.

“We have secured a whole additional range of options for ourselves this year that will serve us well in 2008 and beyond,” Goodwin told analysts in a conference call yesterday, the Associated Press reported.

bgedan@projo.com