Royal Bank of Scotland will hand the government more than £1bn as part of a windfall for shareholders but the payout was overshadowed by the bank’s admission that it would miss its profit targets next year.

The taxpayer-backed bank said it would pay a total of £1.7bn in dividends for the first half of its financial year, partly funded by the sale of a stake in a Saudi Arabian bank. The UK government, which owns 62% of RBS after bailing it out during the financial crisis, will receive about £1.05bn.

RBS reported a 48% increase in first-half pretax profit to £2.7bn and the bank’s £2bn net profit was its best result for more than a decade.

But investors homed in on the bank’s gloomy outlook as it highlighted tough market conditions, and economic and political uncertainty over Brexit. RBS said it was “very unlikely” to reach its targets of 12% return on shareholders’ funds and reducing costs to less than half of revenue next year.

The bank said margins would continue to be compressed by competition for mortgage business, which had prompted some lenders to quit the market, and low interest rates.

Bad debts rose by £182m to £323m, pushed up by problems at a small number of business customers. The bank’s shares fell 6.5% to 202p.

RBS’s chairman Howard Davies said the bank expected a further period of uncertainty as concerns mount about the global economy and the prospect of the UK leaving the EU without a deal.

“The subdued outlook for interest rates is affecting all banks, global economic growth prospects are less favourable, trade tensions between China and the US continue to be strained … and that’s also affecting market confidence,” Davies said.

RBS had no news about its search for a new boss after chief executive Ross McEwan announced his departure in April and accepted the top job at National Australia Bank.

Nicholas Hyett, an analyst at Hargreaves Lansdown, said: “We’ve had no update on who will be replacing Ross McEwan at the helm in 2020 … Whoever it is looks to have a big job ahead of them.”