ROYAL Bank of Scotland (RBS) has spooked investors as it set aside more than £1.3 billion for litigation and conduct costs, sending shares in the state-owned lender down by seven per cent and wiping more than £1.6bn off its market worth.

And chief executive Ross McEwan warned that big businesses have been “stepping back from big decisions” in light of the uncertainty caused by the Brexit vote, while refusing to rule out further branch closures.

Mr McEwan acknowledged the move by the Bank of England this week to cut interest rates will have an effect on RBS, stating that “income will be lower than we initially anticipated, therefore we will have to look at the cost position”. Asked if branch closures and job cuts were on the horizon, he said: “Branch closures are a factor of how many people use branches – it’s not different to any other retailing operation. And you are seeing less and less usage of the branch network and much more usage of technology.”

Mr McEwan added: “The industry is going to have less people employed in it... but that is no different to any other industry that is having technology changes.”

The legacy of past misconduct continued to haunt RBS in the first half of the year as it booked an attributable loss of £2.04 billion, compared with a £179m loss at the same stage last year.

RBS said it set aside a further £1.3bn to deal with litigation and conduct issues in the first half, including a further provision of £450m for PPI (payment protection insurance) claims. Provision was made for litigation in respect of action taken by shareholders over its UK rights issue of 2008. Mr McEwan admitted the action could yet see the bank in court, but told reporters it would prefer to reach a settlement before that.

And there is no immediate prospect of RBS putting its past misconduct issues behind it, with Mr McEwan saying that the journey would continue to be “very noisy” in the next six months as it continues its turnaround plan.

The bank faces a potentially huge legal bill in the US over mis-selling mortgage-backed securities, which RBS is attempting to counter by hedging its sterling and continuing scrutiny of its controversial Global Restructuring Group.

The first-half results included a special dividend payment of £1.2 billion to the government.

The bank booked an adjusted operating profit of £1.16 billion for the first half, down from £2.9bn last year, with its Common Equity Tier 1 ratio – a key measure of capital strength – edging down to 14.5 per cent from 15.5 per cent in December.

Chairman Howard Davies conceded issues such as PPI and litigation continued to “have a depressing impact on our bottom line – in spite of the robust performance of the core business”.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said past misconduct and legal issues continue to cloud the outlook for RBS, warning that the litigation in the US “could move the dial a bit when that hits”. He noted that it was difficult for analysts to predict the costs from the action because the case against RBS will take place on a civil, state and federal level in the US. “I just don’t think there is any real way of quantifying what the costs could be,” Mr Khalaf said. “It’s a bit of a sword of Damocles hanging over the bank. We don’t know how much damage it is going to do.

“The other thing is that the fine will be in dollars, which are now more expensive in pound terms.”

Asked to comment on the outlook for RBS, he said the bank is making progress on its underlying personal and commercial activities, and on its capital position. But he warned it is a “very long and slow road that RBS has to plod along”.

Meanwhile, RBS has scrapped plans to launch its Williams & Glyn unit as a standalone bank, citing the complication and costs involved in cloning its banking platform to support the launch. It said the move is no longer viable in the current, extended low interest rate environment, the effect of which will be felt more acutely by challenger banks.

The bank said it was now pursuing a trade sale of the unit and revealed it has held talks with a number of parties interested in buying the 300-plus branches. Spanish bank Santander, which has previously declared an interest in buying the branches, was this week linked with having made a formal offer for the network.

RBS, which admitted Brexit had been a factor but had not been decisive in the decision, was ordered by the European Union to sell the unit by 2017 as a condition of its £45bn bailout in 2008. It remains committed to offloading the assets by that deadline.

On Brexit, RBS chairman Sir Howard Davies said it was difficult to predict how it will affect its own performance, stating that the economy had already started to slow before the referendum in anticipating of low interest rates continuing.

He said mortgage demand had stabilised after an “initial shock” following the Brexit vote, and said there has “not been much impact” so far on demands for commercial lending.

Mr McEwan said there has been no impact on consumer spending on the basis of debt card transactions, but earlier told the BBC that the Brexit vote that changed customer behaviour.

“Big companies are stepping back from investment back from investment decisions until they get more certainty,” he said.

Mr McEwan said the bank currently has no plans to charge business customers for holding deposits, but there is “possibility” that may change if interest rates fall below zero.

Shares in RBS closed down 13.8p at 178.2p last night, more than £3 adrift of the 502p which constitutes the government’s break-even point on its investment in the bank.

Mr McEwan warned that market conditions will have to improve dramatically before taxpayers get their money back on their 73 per cent stake.

RBS was bailed out at a cost to the taxpayer of £45bn at the height of the financial crisis of 2008/2009.