ROYAL Bank of Scotland may be forced to sell its insurance arm as well as some branches and investment banking operations as European commissioners move closer to a verdict on both RBS and Lloyds.
Stephen Hester, RBS chief executive, has been locked in talks with Brussels and Westminster officials about reducing the balance sheet by 40 per cent, largely through scaling back the investment banking operations.
One source said the European Co
mmission was "wanting its pound of flesh".
A deal on EU support for state aid could be announced this week, involving the sale of 312 RBS branches in England and Wales, which focus on business lending.
According to sources, RBS would also have to sell Direct Line, Green Flag, Privilege and Churchill. It tried and failed to find a buyer earlier this year.
With the commission close to making an announcement on the shape of RBS and Lloyds Banking Group, Lloyds was yesterday in talks with key shareholders as it gauges investor appetite for one of the biggest cash calls on record.
Sources said the bank was hoping to complete the rights issue, thought to be as big as £13 billion, by Christmas.
One top Lloyds investor said the participation and scrutiny of the UK government, through which the taxpayer owns a 43 per cent stake in the bank, made it more likely the fundraising would succeed.
"We have to assume they would have passed it by the Financial Services Authority, by the Treasury and got it approved by the Bank of England, and the government is putting its hand in its pocket, so there is a high degree of testing by interested parties who wouldn't want egg on their face," the investor said.
The share sale would have to be at a discount of at least 40 per cent, given the amount involved and uncertainties over the bank's prospects, analysts said.
Shares in Lloyds nudged up 1.03p to 87.03p yesterday despite a wider market slide, benefiting from the plans to raise capital as an alternative to the government-backed scheme to insure bad debts. The bank also gained from a Credit Suisse upgrade.
Lloyds is expected to face a bill of £2.5bn from the Treasury to avoid entering the insurance scheme for toxic debts.
It is understood that the bank first offered £150 million.
The bank aims to plug a capital gap of more than £20bn with the rights issue, fresh hybrid capital and a convertible bond. It confirmed on Thursday that talks on exiting the asset protection scheme were well advanced.
Shares in Lloyds leapt on Thursday after the bank said EU regulators investigating its reliance on state aid would not impose Draconian penalties. It is thought to be close to a deal with the European Commission to sell its Lloyds TSB Scotland branch network, its Cheltenham & Gloucester outlets and the internet banking arm Intelligent Finance.
Yesterday's developments came as the Federation of Small Businesses in Scotland warned that the banking dominance of Lloyds and RBS risked "long-term damage" to the economy.
