The government is in talks to sell up to a third of its holding in Royal Bank of Scotland to Abu Dhabi investors in a deal that could lose billions of pounds for taxpayers in the bailed-out lender, the BBC reported on Monday.
A sale deal near current prices would see British taxpayers lose almost half their investment in RBS, which the government rescued from collapse in 2008, as the bank's shares are trading at barely half the state's average purchase price of 50 pence.
UK Financial Investments, which holds the government's stake, has held regular talks with big investors about their views on the industry and RBS, and these have included meetings with sovereign wealth investors, banking sources said.
Britain pumped 45.5 billion pounds ($72.5 billion) into RBS, leaving the taxpayer with an 82 percent holding. A deal could see at least 10 percent and up to a third of the government's stake sold, the BBC said.
Abu Dhabi, one of the oil-rich states of the United Arab Emirates, could be attracted to a deal after making billions of pounds on a bet on rival British bank Barclays during the financial crisis.
The BBC said the government has been negotiating for months with Abu Dhabi sovereign wealth funds and wants a deal to be agreed by the year-end. An earlier version of the report said the talks were advanced.
The Treasury said its strategy was to repair and return RBS to full health. The government's policy has always been to return RBS to the private sector, but only when it delivers value for money for the taxpayer, it said.
I wouldn't be surprised to see a small stake sold at below the in-price (purchase price), but I would be surprised to see a large stake sold, said Mike Trippitt, analyst at Oriel Securities.
There could be a public backlash if the government is seen to be selling the stake off too cheaply, although investors and analysts said any sign the government is considering an exit route would be good news.
RBS shares closed at 27.8 pence, leaving the government sitting on a 20 billion-pound paper loss.
RBS and UKFI declined to comment.
Abu Dhabi made about 3 billion pounds after investing in Barclays during the financial crisis, in a complex deal that helped the bank stay out of state hands.
The main investor then was Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi's ruling family and the owner of English soccer team Manchester City.
RBS CEO Stephen Hester is three years into a five-year turnaround plan that he has dubbed the biggest ever bank restructuring.
But RBS made a 2 billion pound loss last year, its fourth straight annual loss, pushing back the time it is expected to deliver good returns for investors.
That renewed calls for Britain to consider kick-starting the sale of the stake at a loss to cut growing political interference - mostly on lending and pay - and boost the appeal of the bank for private investors.
RBS is not alone in needing to improve its prospects to get rid of a government shareholder, and Britain also holds a 40 percent stake in Lloyds. It is sitting on a 10 billion pound loss on that 20 billion pound rescue.
(Editing by Dan Lalor and David Stamp)