SHARES in Royal Bank of Scotland slumped nearly seven per cent, wiping £1.7 billion from its stock market value, after it warned it was “very unlikely” to meet a key profitability target in 2020 because of Brexit uncertainty.

Edinburgh-based Royal unveiled its biggest first-half profit in more than a decade and returned a further £1.7bn in dividends to shareholders yesterday. The bank made a pre-tax operating profit of £2.7 billion for the six months to June 30, up from £1.8bn, with the results boosted by a £444m gain on the disposal of its stake in Saudi bank Alawwal.

But it warned the wider economic and political uncertainty, alongside continuing low interest rates and tough competition in the mortgage market, means it is “very unlikely” it will hit its target return on tangible equity of more than 12% or bring its cost to income ratio below 50% in 2020.

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The bank repeated that Brexit uncertainty was causing larger corporates to delay investment decisions because of the lack of clarity around future trading relationships with Europe, but made no further provision for bad debts rising as a result of the UK’s withdrawal from the EU. It made a £100m Brexit provision in the second half of last year.

Chief executive Ross McEwan said: “These results are set against an external operating environment which is impacting us in areas we have no control over. Lower for longer interest rates, a deterioration in investment appetite from large corporates and a very competitive mortgage market are all factors that are putting pressure on our income.

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“Given these factors, achieving a 12-plus per cent return on tangible equity by the end of 2020 is very unlikely in the current operating environment, but this remains the target in the medium term.”

The bank underlined conditions continue to be highly competitive in the mortgage market, with its net interest margin – a key measure of profitability – dipping to 1.83% from 2.02%.

Net interest income dropped to £4bn from £4.3bn, though operating expenses were reduced by £173 million or 5% to £3.4bn, net lending increased by £3.6bn to £287bn, and the bank said its common equity tier one ratio – a measure of capital strength – would be 16% after its latest dividend pay-outs.

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Chairman Sir Howard Davies said: “The subdued outlook for interest rates is affecting all banks. Global economic growth prospects are less favourable. There are trade tensions – the relationship between China and the US continues to be strained... and that’s also affecting market confidence.

“Against that difficult backdrop we have continued to deliver bottom line profitability and plan to return more capital to shareholders, including to the UK Government and the taxpayer.”

The bank said impairment losses on loans increased by £182m to £323m, “reflecting a “small number of single name charges in commercial banking”. Finance chief Katie Murray said the bank was seeing “small signs of strain, but at this point nothing we are particularly concerned about.”

The bank declared an ordinary interim dividend of 2p and a special dividend of 12p, resulting in a £1.7bn return to shareholders. Some £1bn of that will go to the UK Government, the bank’s biggest shareholder with a 62.2% stake. Mr McEwan said the bank has now paid out more than £3bn in dividends since resuming pay-outs. He was unable to say when the UK Government would move to sell down its stake.

The bank had no update on its search for a successor for Mr McEwan, who has agreed to become the new boss of National Australia Bank, beyond stating its assessment of internal and external candidates was progressing well. Alison Rose, deputy chief executive of NatWest Holdings, the bank’s ring-fenced holding company, has long been considered a favourite for the role, though Ian Stuart of HSBC and Alison Brittain of Whitbread have also been linked.

Sir Howard said Mr McEwan will remain in post until April at the latest, leading one journalist to ask whether he might take his “eye off the ball” given the potential length of time until his departure. Sir Howard replied: “All Blacks are not known for taking their eye off the ball,” a reference to Mr McEwan’s New Zealand nationality.

Shares closed down 14.2p at 202.9p.