ROYAL Bank of Scotland has seen £1.25 billion wiped off its market capitalisation after confirming it is unlikely to start paying dividends until at least 2017.

Chief executive Ross McEwan admitted the business is still paying for the mistakes of the past as it booked £459 million of further charges for issues including payment protection insurance and foreign exchange rigging.

It is also being probed by US authorities amid claims it misled investors over mortgage backed securities.

While Mr McEwan was keen to point out the progress made in simplifying the structure of RBS he admitted it would still be another “year to 18 months” before it was “substantially cleaned” even as it made a surprise profit for the second quarter.

Shares dropped more than three per cent, ending the day down 10.8p to 342.4p, reducing its market capitalisation from £40.86b to around £39.61bn.

Mr McEwan said the bank had made the announcement on dividends to dampen speculation in the market that it may resume payments in a shorter timescale.

The New Zealand born boss, who took the top role at RBS in 2013, believes the bank needs to get through another few sets of stress tests and demonstrate regular profitability before it can think about payouts to shareholders, with the first quarter of 2017 the earliest date that may happen.

He said: “It was appropriate to update the market so people don’t get ahead of themselves.”

Finance director Ewen Stevenson added: "There were some analysts out there with expectations of capital distributions in 2016. We felt it was important to be transparent and to ground people in what we think is a realistic expectation.”

That came as the bank recorded a £293m bottom line profit for the three months to the end of June, ahead of the £230m for the same period of 2014 and overall market expectations.

However the £446m loss it booked for the first quarter of this year meant its overall loss for the six month period was £153m.

In the quarter RBS took a £1bn charge to cover the cost of restructuring as Mr McEwan’s simplification process and trimming of the investment bank continues apace.

Richard Hunter, at Hargreaves Lansdown Stockbrokers, described the results as a “mixed bag” and added: “A date of early 2017 has now been flagged as the earliest possible time for the resumption of the dividend, giving income seeking investors one more reason to avoid the shares.”

In response to speculation the UK Government may start selling part of its 78 per cent stake in RBS as early as September Mr McEwan said: “The timing itself is up to the government.”

However outgoing chairman Sir Philip Hampton suggested the bank will be able to improve its performance once it is no longer majority owned by the state.

He said: “I think the bank will be better when it has got more natural and happy owners rather than an owner that has from time to time been unhappy and reluctant.”

Mr McEwan outlined the total number of properties occupied by the group is expected to be 2,100 by the end of this year, from 2,500 at the close of 2014. He hopes to cut the number to 1,500 by the end of next year.

Mr Stevenson pointed to changes being made at its Gogarburn headquarters on the outskirts of Edinburgh and said: “We are about to move to flexible working and are reconfiguring that office to take a lot of people into it and are going to get out of some other buildings in Edinburgh. We are aggressively working through a fairly extensive real estate portfolio.”

Mr McEwan said the bank’s IT glitch in June this year, which saw 600,000 customer transactions delayed as a result of a processing problem, was “unacceptable”.

He said: “You have to have your systems up 100 per cent of the time. It is really disappointing.”

However he said the work done on improving IT allowed the bank to more quickly identify where the problem had occurred.

He outlined that RBS continued to invest heavily in improving its IT with Mr McEwan outlining his desire to “substantially” reduce the 9,500 systems and applications used across the bank.

RBS hopes to complete its exit from the US bank Citizens by the end of the year. Mr McEwan was hopeful an initial public offering of Williams & Glyn, which it must sell to meet European state-aid rules, could still be completed by the end of next year.

He said: “It is a very complex business to take a bank from inside a bank. It is sitting on all of our core systems and relies on our functions. This is very complicated. We are making very good progress but it is tough to get it out.

“We are aiming for an IPO at the end of next year. Our view is we will get there but there is lots of work to do.”