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RBS faces more forced sales in UK bank shake-up

A deal between Royal Bank of Scotland, EU regulators and the UK government could include unplanned disposals, the bank said for the first time, ahead of a radical shake-up of the UK banking sector.

RBS and Lloyds, 70% and 43% state-owned, respectively, have been locked in negotiations for months with the UK government over an insurance scheme for bad debts, and are in parallel talks with the Treasury and EU over measures to compensate for the billions received in state aid.

Plans for both banks are due to be made public this week, possibly as early as Tuesday, sources close to the deal have said, as part of a deal which will include large-scale disposals and which the government hopes will create new retail banks.

RBS's recognition on Monday that its deal will include “divestments not initially contemplated” revived concerns on Monday that it could suffer tougher than expected sanctions, though the bank said it was sticking to its turnaround plan.

“It remains RBS's goal that any required divestments do not threaten its recovery plan which is already underway,” it said.

“While details remain sketchy, our reading of the ‘new’ plan for RBS is fairly valuation neutral, but with increased execution risk and raising further questions about the quality of its balance sheet,” Jonathan Pierce, analyst at Credit Suisse said in a note on Monday.

A British government source had told Reuters on Friday that RBS was likely to sell its insurance operations, which include the Churchill and Direct Line brands, along with other assets to help reduce the size of its balance sheet.

RBS had put its RBS Insurance unit, Britain's largest car insurer, on the block last year but scrapped the sale this year after failing to garner enough interest.

Any deal should, however, avoid the sale of RBS's US arm, Citizens -- seen as a “red line” issue for RBS Chief Executive Stephen Hester -- but will include the sale of 312 RBS-branded branches in England and Wales -- which mainly focus on small business lending, a source close to the matter said.

“In our view it appears that the authorities are intent on imposing tougher sanctions on RBS,” analysts at Cazenove said. “In what is still an uncertain picture, potentially the dilution to RBS from the sale of (RBS) Insurance as well as demerger of branches could dilute potential earnings by 10%.”

Finding buyers, however, will remain a key issue for both RBS and Lloyds, particularly if the Treasury carries out plans to block existing players in the market from bidding.

Lloyds is set to be told to sell its Cheltenham & Gloucester branch network, Lloyds TSB Scotland and internet banking unit Intelligent Finance, sources familiar with the matter have said.

On the government insurance scheme for bad debts, RBS said on Monday it was close to an agreement with the Treasury that would “reflect market improvements since February and RBS's ongoing recovery whilst giving protection against future potential stressed case losses.”

Sources close to the deal said on Saturday that RBS is close to agreeing more flexible terms on the so-called Asset Protection Scheme, avoiding an upfront fee agreed in March of up to Ł17.5 billion ($28.74 billion) to join the APS for five years.

Instead, the bank will pay annually, under a “pay-as-you-go” arrangement whereby the premium depends on the assets insured.

Unlike RBS, Lloyds is expected to announce this next week it has pulled free of the APS entirely, raising cash in the market instead.

Several of the sources have said the bank will raise at least Ł12 billion and up to Ł13.5 billion in a rights issue, with an additional Ł7 billion raised in so-called contingent capital. (Reuters)