SHARES in Royal Bank of Scotland dropped more than three per cent after a massive provision for PPI (payment protection insurance) claims and a “disappointing” quarter by its investment banking operation dragged the institution back into the red.

State-backed Royal Bank slipped to a £315 million attributable loss for the third quarter as it set aside a further £900m to deal with a greater than anticipated flood of PPI compensation claims ahead of the August deadline. The bank had made a profit of £448m at the same stage last year.

The extra provision for PPI was at the upper end of forecasts, with the bank having previously guided on setting aside between £600m and £900m to deal with complaints. And it led to a 50 basis point reduction in the bank’s capital strength, with its CET1 (common equity tier 1) ratio 15.7% at the end of the quarter.

READ MORE: PPI claimants left waiting as banks swamped by complaints

The overall bill to the banking industry from the PPI scandal is now more than £36bn.

But PPI, which was sold alongside financial products such as loans and credit cards, was not the only stumbling block for Royal in the third quarter. NatWest Markets, its investment banking operation, saw  income plunge by nearly 50% to £184m, contributing to the division reporting a loss of £193m for the quarter. The bank said its rates income came under pressure from deteriorating sentiment in the global economy, and a fall in bond yields.

Royal Bank reported an impairment loss of £213m. This included a £55m charge which director of finance Katie Murray said was a reflection of “a more uncertain economic outlook, including a deterioration of growth forecasts, the ongoing volatility we have seen, and the slightly increased unemployment figures from an admittedly low level”.

Ms Murray observed that the impairments were “slightly higher” than consensus, underlining the “strain” in the economy. But she told journalists the “signs of growing volatility we are seeing” are not exclusively related to Brexit, pointing to tensions across the global economy.

READ MORE: PPI costs soar for Scottish lenders after last minute surge in claims

Ms Murray said: “I thought, given the week, you would expect me to say something about Brexit. We are very much focused on controlling the controllables as the Brexit economic and political uncertainty continues.

“As far as RBS is concerned, our preparations are in place, with our Amsterdam and Frankfurt offices totally operational.”

The bank reported that net lending across the business, including personal banking, commercial and private banking, and Ulster Bank, increased by 3.2 per cent, beating its 2% to 3% target.

But Ms Murray noted that Brexit uncertainty was continuing to cause large corporates to delay investments in the UK.

And the bank’s net interest margin, in essence the difference between what it earns on loans versus what it pays out to savers, continued to come under pressure. It fell to 1.97% from 2.04% in the third quarter of last year amid stiff competition in the mortgage market.

The results were the last to be delivered by Royal Bank before Alison Rose officially takes over as chief executive from Ross McEwan next week.

READ MORE: Bank of Scotland owner takes £1.8bn PPI hit

Ms Murray told reporters that, “as expected” the third quarter results were “significantly impacted by a PPI charge of £900m following greater than predicted complaint volumes in the lead up to the deadline.”

RBS had provided a total of £5.3bn in respect of PPI claims to the end of the first half on June 30.

Asked whether the bank, which remains 62 per cent owned by UK taxpayers, could now draw a line under PPI, Ms Murray said the £900m  charge reflected the bank’s “best estimate” of what it currently envisages the outstanding liability will be.

“It would be a very brave FD (finance director) to say the line was completely drawn under it, but this is certainly our best estimate of that,” she said.

Ms Murray said the bank currently had no plans for further branch closures but noted that as it continues to invest in transitioning to digital banking it would “continue to see greater efficiency in our cost base.”

Nicholas Hyett, equity analyst at stockbroker Hargreaves Lansdown, said: “PPI has checked out with a bang, driving RBS back into the red in the third quarter - the industry will be relieved to see the back of the whole sorry saga. However, it’s not the main culprit in today’s profit miss. RBS’ s investment bank, NatWest Markets, delivered a very disappointing result – with core income almost halving in a tougher rates environment.

“Looking past the headline numbers though we see some positive signs. Lending growth continues across the retail and commercial banks and bad loans remain low by historic standards.

“While the difference between what the bank can earn on loans and has to pay on deposits remains under pressure, the interest margin is holding up reasonably well in our view”

Shares in Royal Bank closed down 3.3%, or 7.8p, at 225.9p.