By Andrew MacAskill and Sinead Cruise
LONDON (Reuters) - Royal Bank of Scotland (LON:RBS) on Friday reported wider first-half losses, 1.3 billion pounds of new litigation charges and axed plans to turn its Williams & Glyn division into a stand-alone bank, as it braces for post-Brexit shocks to the UK economy.
RBS, which has not made an annual profit since 2007, booked 2.05 billion pounds of losses for the first half of 2016, up from a 179 million pounds loss in the first half last year.
Chief executive Ross McEwan is battling to complete a vast restructuring of the taxpayer-backed bank, which includes a raft of asset sales, job cuts and multi-billion dollar charges to settle litigation and pay regulatory fines for past misconduct.
Those issues have complicated the challenge of finding new sources of profitable business in a low interest rate economy hit by feeble credit demand, which now faces new pressures from Britain's vote to leave the European Union and prospects of a new referendum on Scottish independence.
RBS said it no longer planned to build an independent technology platform for Williams & Glyn, citing complexity and the lower interest rate environment.
The bank had originally wanted to turn the small business lender into a 'bank within a bank' so it could achieve a clean break when the business was sold under the terms of its 45.5 billion-pound state bailout in the global financial crisis.
But RBS said the risks and costs inherent in its plan were no longer "prudent" and it would look at other ways to achieve the carve out, which has already cost it 1.5 billion pounds.
Spain's Banco Santander (MC:SAN) has made a formal offer to take over Royal Bank of Scotland's Williams & Glyn business, two sources familiar with the matter said earlier this week.
RBS shares, which have fallen almost 40 percent so far this year, were trading 4 percent lower by 0812 GMT.
"These results show how much work RBS still has on its plate, progress has been made, but it has been slow," Laith Khalaf, a senior analyst at Hargreaves Lansdown (LON:HRGV) told Reuters.
"If you went back to the financial crisis very few people would predicted that it would have taken so long to heal the wounds. Whilst RBS is relatively well capitalised, the issue is profitability rather than solvency," he said.
RESTRUCTURING COSTS
Edinburgh-based RBS's total income fell by almost a fifth to 6.06 billion pounds in the first half, while the bigger losses were partly driven by a 630 million pound charge for corporate restructuring, some 345 million pounds of which related to Williams & Glyn.
Impairments rose by more than a quarter to 409 million pounds and the bank warned a target to reduce its cost to income ratio below 55 percent by 2019 would be more challenging in the current low rate and low growth environment.
RBS said restructuring costs were expected to remain high in 2016, totalling more than 1 billion pounds.
The bank also set aside an additional 450 million pounds to compensate customers mis-sold payment protection insurance and made a 180 million euros provision for redress in its Irish tracker mortgages business.
These charges come on top of 707 million pounds of new litigation charges. Analysts at Bernstein attributed a large portion of these to RBS's long-running dispute with investors over its 2008 rights issue.
The bank continues to wait for what analysts broadly expect to be the biggest regulatory penalty in its history for its role in mis-selling U.S. mortgage bonds in the run up to the financial crisis.
"We continue to deal with a range of uncertainties in the external environment and we will also have to manage conduct-related investigations and litigation, including U.S. RMBS, throughout 2016, and substantial related incremental provisions may be recognised during remainder of year," RBS said.