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By Patricia Kowsmann
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- The Royal Bank of Scotland Group PLC (RBS) said Monday it will likely have to sell off more assets than initially thought under negotiations with the European Union over competition concerns related to the U.K. government's bailout last year, a sharp contrast to what peer Lloyds Banking Group PLC (LYG) expects.
RBS also said its agreement with the U.K. government over an asset protection scheme is nearing completion and will reflect recent improvements in the market.
The negotiations with the U.K. and EU are related to bailout funds received by RBS and Lloyds during the darkest days of the global financial crisis.
In exchange for the help they received, they now have to fulfill requirements from the European Commission, which wants to make sure aided banks aren't in competitive advantage to those that stayed independent. Both banks are also looking to adjust the terms of their arrangements with the U.K. government to cut costs related efforts to insure potentially toxic assets on their books.
Both RBS and Lloyds are likely to make final announcements on their talks with the EU and the U.K. Tuesday, in what is expected to be the kickoff of an historic revamp of the U.K. banking system.
The U.K. government is keen to improve competition, and divestments from both RBS and Lloyds could be snapped by established foreign banks or potential newcomers, including Virgin Money, part of Richard Branson's Virgin Group, which applied recently for a banking license in the U.K. Branson confirmed Monday that he wants to establish a new bank -- Virgin Bank -- in the new year and is looking at asset to be sold by other U.K. banks.
RBS' comments Monday came days after Lloyds said it is likely to escape the APS through a GBP25 billion capital-raising. It also said that based on EU talks, divestments won't be "material."
The banks' participation in the APS is important because it will mean more or less influence from the U.K. government and the EU over their businesses. By participating, RBS' government stake could rise to about 85% from 70% currently. The U.K.'s 43% stake in Lloyds will stay the same if it avoids the plan.
"It remains RBS' goal that any required divestments do not threaten its recovery plan which is already underway," RBS said.
At 1241 GMT, RBS shares were down 3 pence, or 7%, at 39 pence after opening down more than 12%.
"There are still too many unknowns, and it's hard to tell how RBS will look like after all this," one analyst said.
Analysts said divestments could include more than 300 RBS branches in England, the sale of its Churchill, Green Flag and Direct Line insurance operations, and its U.S. retail bank Citizens, although RBS said that was a "core" business.
Under the APS to ring-fence bad assets, banks would pay the government a fee in the form of shares. In RBS' case, it would pay at least GBP6.5 billion in nonvoting shares to receive insurance for GBP325 billion in assets that turned sour during the financial crisis.
Since the banks agreed on the insurance in March, however, market conditions have improved, and Lloyds is trying to escape participating in it.
RBS said that it "expects the agreement on the APS to reflect market improvements since February and RBS' ongoing recovery, whilst giving protection against future potential stressed-case losses."
RBS plans to announce that it will shoulder as much as GBP60 billion - including GBP20 billion in charges already taken - in initial losses on an insured asset-pool of GBP280 billion, according to people familiar with the situation.
This is GBP20 billion more in first losses that the bank originally agreed to incur last February.
However, the fee to participate in the program, to be paid in shares, will be staggered over several years, instead of being paid upfront as intended, these people said. This would give RBS greater flexibility to withdraw from the insurance plan in the future.
Last week, Lloyds said it may avoid the scheme completely by raising capital through a combination of a rights issue and contingent capital raising, and the exchange of existing securities.
The original plan was to have roughly GBP260 billion in risky assets being insured for a fee of GBP15.6 billion, which would be paid in the form of nonvoting shares.
-By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com
(Sara Schaefer Munoz of the Wall Street Journal contributed to this article.)