(Adds detail and analyst comment.)
By Margot Patrick
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Royal Bank of Scotland Group PLC (RBS) Tuesday said it will spin off its insurance arm and sell RBS branches in England and Wales as part of a European Union-agreed restructuring plan that includes the U.K. government raising its stake in the bank to 84% through a GBP25.5 billion capital injection.
RBS said it will also enter a government insurance program, called the asset-protection scheme, to insure a GBP282 billion of loans and investments against any losses over an initial GBP60 billion that would be borne by RBS.
The reshaping of RBS - which has now received more bailout cash than any other bank - is more dramatic than the bank and shareholders had anticipated when its rough outline was made in February, and highlights how the EU is striving to take no chances of further government rescues of banks as it sets out its conditions to approve state aid.
RBS a year ago received GBP20 billion in government money, to keep it lending to businesses and home buyers during the then-deepening financial crisis. The bank announced a restructuring program in February that included selling businesses, but would have kept the insurance business and retail branches.
Part state-owned peer Lloyds Banking Group PLC (LYG) also announced a capital-raising and changes to its business Tuesday, but it won't be significantly increasing its reliance on the government.
RBS shares fell 1 pence, or 1.5%, on the news, to trade at 38 pence at 0939 GMT. The stock has slipped about 12% since Friday after RBS on Monday said it would have to make more disposals than it had first expected to appease the EU on its state aid package.
RBS said over the next four years it will sell off its insurance arm--probably through an initial public offering--and divest its global merchant services unit and its interest in commodities trading joint-venture RBS Sempra Commodities, collectively accounting for GBP5.7 billion of RBS' GBP26.9 billion revenue in 2008.
In addition, it will sell branches operating under the RBS brand in England and Wales, its NatWest branches in Scotland, and the accounts of some small and medium business customers across the U.K., totaling about 2 million customers and GBP20 billion in assets.
The U.K. government is aiming to have these bought by a new entrant in U.K. banking, to make the sector more competitive.
"I believe today marks a key milestone in the radical restructuring we are undertaking to bring RBS back to standalone strength. The agreement in principle reached with the (European Commission) is clearly more material for the structure of our group than we had hoped, increasing risk to both execution of the plan and earnings dilution," RBS Chief Executive Stephen Hester said in a statement.
But he said it is still an "acceptable result" and that the bank's essential strengths remain intact.
Execution analyst, Joe Dickerson, said there are still "significant questions" on how the bank will look after the disposals.
"It's hard to see what shareholders are getting when investing in the bank," he said.
To improve its capital position and to serve as a buffer against potential credit losses, RBS will issue GBP25.5 billion in new "B" shares to the government, taking the state's stake to 84.4%, from 70.3%. The government's voting rights will remain at 70%, and it has agreed not to raise its ordinary shareholding above 75%.
The B shares are convertible into ordinary shares at any time, but won't carry a mandatory conversion clause.
RBS won't be able to pay any share dividends for two years, or make any coupon payments on its subordinated debt.
The government has also agreed to subscribe to up to GBP8 billion in further shares, serving as contingent capital if RBS core Tier 1 ratio falls below 5%.
RBS will keep the benefit of current and future tax losses that it had agreed to give up when it had first agreed to use the asset-protection scheme in February. The value of these is estimated to be as much as GBP11 billion. Its fee to use the insurance policy will be GBP700 million a year between 2009 and 2011, then stepping down to GBP500 million thereafter.
If it wants to get out of the program, it can pay a GBP2.5 billion break fee, minus fee payments already made.
The EU agreement "in principle" on the plan is expected to be finalized within weeks.
-By Margot Patrick, Dow Jones Newswires; +44 (0)20 7842 9451; margot.patrick@dowjones.com
(Patricia Kowsmann contributed to this item.)