"We aim to have RBS back into profit in 2018 representing a significant step towards being able to start repaying UK taxpayers for their support."
The results mark the ninth consecutive loss for the Bank, as litigation and conduct costs rose to £5.9bn and restructuring costs hit £2.1bn.
Restructuring costs include a £750m provision for the plan announced earlier this week that would see RBS boost banking competition instead of selling Williams & Glyn.
If adopted, this alternative plan would replace the existing requirement to achieve separation and divestment by 31 December 2017.
In addition, £706 million of the remaining restructuring costs related to Williams & Glyn, including £146 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
Excluding expenses associated with Williams & Glyn, write-down of intangible assets and the VAT recovery in Q2, adjusted operating expenses reduced by £985m, or 11%, compared with 2015, exceeding the Bank's target of £800m.
RBS has reduced adjusted operating expenses by over £3bnin the last three years, but plans to reduce expenses by a further £2bn over the next four years, with around two thirds of this affecting the core bank.
RBS now expects that 2017 will be its final year of "substantive legacy clean up with significant one-off costs" and consequently expects to be profitable in 2018.
Chief Executive of RBS, Ross McEwan, said: "In 2016 RBS made an attributable loss of £7 billion, mostly reflecting charges for outstanding litigation and conduct, and costs associated with restructuring of the bank. The financial impact of these issues is a difficult but necessary step in working through the bank’s legacy issues. These costs are a stark reminder of what happens to a bank when things go wrong and you lose focus on the customer, as this bank did before the financial crisis.
"The past is not completely behind us, with our dealings on Residential Mortgage Backed Securities and Williams & Glyn, our residual European Commission State Aid obligations, two significant issues that we still need to resolve. The recent proposal by HM Treasury on an alternative way to increase competition to allow us to meet our State Aid commitments would deliver an outcome more quickly, and with more certainty than undertaking a complex sale. We have been able to provide for both of these in our accounts, though there may still be substantial additional provisions on RMBS.
"This is a bank that has been on a remarkable journey. We still have further to go. But the next three years will not be the same as the past three. Legacy issues will take up a decreasing amount of our time and focus. Our customers, our cost base and the measures we plan to implement to return the bank to sustainable headline profits will be where we focus our efforts. Assuming we can conclude our issues on RMBS this year and resolve our residual State Aid obligations, we aim to have RBS back into profit in 2018 representing a significant step towards being able to start repaying UK taxpayers for their support."
Laith Khalaf, Senior Analyst at Hargreaves Lansdown, commented: "The botched Williams & Glyn separation has also been a costly embarrassment for RBS, which spent £700 million in 2016 to spin off the bank, on top of £750 million to fund the new plan, which totally dispenses with the need to hive off Williams & Glyn. Assuming the plan goes ahead, RBS faces further restructuring costs to re-integrate the bank it has been trying to separate from for such a long time.
"RBS is of course still three quarters owned by the government, and that will remain the case for the foreseeable future, seeing as the share price needs to double for the taxpayer to break even.
"The bank is certainly making progress, though it has been severely hampered by mopping up the mess left by the financial crisis. There is every reason to believe RBS can be a profitable bank, returned to private hands, the question is how long it will take to get there."
