Selling Williams & Glyn brand was a condition of the bank's rescue during the global financial crisis from the European Union in return for taking state aid.Joseph Dickerson, an analyst at Jeffries, said the delay may push up the overall cost of carving out the new bank."The delays could call into question management execution of RBS's restructuring process," Dickerson said.

RBS said it had undertaken "further extensive analysis" on the separation and divestment of the business, concluding that the deadline may not be met and saying it was exploring alternative means to meet its commitment to regulators.

"Due to the complexities of Williams & Glyn's customer and product mix, the programme to create a cloned banking platform continues to be very challenging and the timetable to achieve separation is uncertain," the bank said in a statement.

"The overall financial impact on RBS is now likely to be significantly greater than previously estimated," it added.A spokesman for the European Union said it is closely following the separation process and RBS executives are committing resources to meet the promise. "We understand that RBS and the UK authorities remain fully committed to this divestment," he said.

Shares in the bank were trading down 2.9 percent at 244.8 pence in reaction to the news.

The separation process has already cost RBS, which is 73 percent owned by the UK taxpayer, about 1.5 billion pounds ($2.2 billion).RBS had earlier committed to a sale of Williams & Glyn before the end of 2017, under the terms of its 45.5 billion pound bailout at the peak of the 2007/2008 financial crisis.Williams & Glyn has 1.8 million customers, net loans and advances of 20 billion pounds and customer deposits of 24 billion pounds. A carve-out from its parent would have made it one of the largest of the new banks that regulators hope to nurture to boost competition.

RBS will report first quarter results for 2016 on Friday.

(Reporting by Andrew MacAskill and Sinead Cruise; Editing by Carolyn Cohn/Ruth Pitchford)