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RBS warns it will miss profit target amid tough market; shares fall

Royal Bank of Scotland Group PLC reported higher second-quarter profits but warned it is "very unlikely" to hit profit targets after suffering in a highly competitive mortgage market.

The U.K. bank reported second-quarter profit attributable to ordinary shareholders of £1.33 billion, up from £96 million a year earlier, boosted by lower legal costs and higher noninterest income. But it said it was unlikely to hit its target of boosting return on tangible equity, a key measure of bank profitability, to 12% by 2020 with a cost-to-income ratio of less than 50%. The metric was 57.2% in the half year to June.

Shares were down 6.68% as of 12:53 p.m. London time.

Underlying ROTE was 7.5% in the first half, after the effects of the merger between Alawwal Bank — which RBS part-owned — and Saudi British Bank were stripped out. However, the bank said these two measures remain strategic targets that it believes are achievable in the medium term.

"It is hard to call out what is going to happen next year on income. We are disappointed to move it [the target] out to the medium term. The consensus is 9.5% ROTE for next year, but I would be disappointed if we were not ahead of there," said CFO Katie Murray.

The net interest margin was 2.02% in the second quarter, or 5 basis points lower than in the first quarter. The bank said this was primarily a reflection of a more competitive mortgage market and the contraction of the yield curve, an indicator of expected returns.

Outgoing CEO Ross McEwan said ring-fencing, which saw U.K. retail banks legally separated from their investment banking arms at the start of this year, resulted in more liquidity in the mortgage market as banks held more capital in the their U.K. focused operations, making it very competitive.

The bank took out £173 million of costs in the first half and aims to cut £300 million in 2019. McEwan said the cost-reduction program would continue as the bank moved to adapt to the digital era. It has plans to launch two digital-only banks, Bo and Mettle, shortly.

He also said he felt the bank could afford to reduce its capital buffers, and RBS has a long-term target of about a 14% common equity Tier 1 ratio by the end of 2021. It currently stands at 16%.

"We still think we are running quite high levels of capital with our risk-weighted assets," said McEwan. "As we get better at learning more from the stress tests, we are learning more about the bank's capital requirements."

The bank, in which the government still owns a 62% stake, has returned £3.3 billion to shareholders, of which £2 billion has been paid to U.K. taypayers.

The bank said it did not feel the need to increase its provisions for payment protection insurance misselling, despite Lloyds earlier this week surprising the market by dramatically increasing its own PPI provision.