A deal between Royal Bank of Scotland, EU regulators and the UK government could include unplanned disposals, the bank said for the first time on Monday, ahead of a radical shake-up of the UK banking sector.
RBS and Lloyds, 70 percent and 43 percent 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.
Shares in the bank tumbled almost 14 percent at the open, but recovered to trade down 5.8 percent by 0907 GMT (4:07 a.m. EST) at 39.5p. Lloyds shares were down 1.9 percent at 85.2p.
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 U.S. 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 percent.
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 17.5 billion pounds ($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 12 billion pounds and up to 13.5 billion in a rights issue, with an additional 7 billion raised in so-called contingent capital.
(Additional reporting by Myles Neligan; editing by Simon Jessop)