UPDATE 2-RBS must tackle capital issues before share sale -UKFI
* RBS strategy update 'crucial' for investment case
* Capital, future strategy must be tackled before sale
* UKFI accelerated departure of ex-RBS boss Hester
* Restructuring may accelerate sale process-New UKFI head
By Matt Scuffham
LONDON, Nov 12 (Reuters) - Part-nationalised Royal Bank of Scotland must address issues over its capital and future strategy before the government can start selling its shares, the new head of the agency managing Britain's bank stakes told lawmakers.
James Leigh-Pemberton, who will become executive chairman of UK Financial Investments (UKFI) in January, said the outcome of new RBS Chief Executive Ross McEwan's strategic review, due in February, would be critical in determining whether the bank is attractive to investors.
"There are certain issues in relation to RBS which absolutely have to be tackled as a precursor to successful reprivatisation: sufficient capital; strategic focus on businesses where they enjoy competitive advantage and higher returns and the normalisation of the capital structure," Leigh-Pemberton told parliament's Treasury Select Committee.
Britain is keen to offload its stakes in RBS and state-backed Lloyds Banking Group, having pumped a combined 66 billion pounds ($105 billion) into the banks to keep them afloat in the 2008 financial crisis.
RBS, 81 percent owned by taxpayers, said earlier in November it would create an internal "bad bank" to fence off its riskiest assets, part of a raft of measures designed to heal its relationship with the government and speed up its eventual privatisation.
"The new plan will enable reprivatisation at least on the timetable that would have been achieved otherwise, and possibly scope to act a little faster," Leigh-Pemberton said, adding that it was too early to say when a sale might take place.
Outgoing UKFI chairman Robin Budenberg told the committee that a sale of the government's shares in RBS had not been a serious prospect at any time in the past two years.
Looking to illustrate UKFI's independence, Budenberg said UK Finance Minister George Osborne had proposed steeper cuts in bankers' bonuses than were "commercially acceptable" at RBS and Lloyds, but the agency had intervened to limit the reductions.
RBS chairman Philip Hampton said last year the bank would be ready for privatisation in 2014 but admitted earlier in November the timescale had been pushed back. Industry and political sources have said it is likely to take 3 to 5 years.
Budenberg was also questioned over UKFI's role in the ousting of RBS's former chief executive, Stephen Hester. He said RBS's board were already mulling succession plans but UKFI's intervention accelerated the process. Budenberg said UKFI discussed the change with RBS chairman Philip Hampton before consulting Britain's finance ministry.
Andrew Tyrie, chairman of the Treasury Select Committee, said UKFI's mandate to run the banks commercially and at "arm's length" from the government "needs a lot of qualification," given the Treasury's involvement in a number of issues.
Britain's financial regulator said in June that RBS had a capital shortfall of 13.6 billion pounds, the biggest of any UK bank. McEwan sees its restructuring plan as part of a process of reshaping the bank to remove all concerns around its capital strength within the next 2 to 3 years.
The bank plans to hold a core capital ratio of about 11 percent by the end of 2015 and 12 percent a year later, which is 3 percentage points above its current position.
Britain began selling shares in Lloyds at a profit earlier this year, but a sale of its stake in RBS is much further off, with taxpayers still sitting on a paper loss of 15 billion pounds at current prices. Shares in RBS were down 2.6 percent at 1430 GMT, compared with a 0.8 percent decline in the European banking index.