* JPMorgan to help devise strategy for Lloyds, RBS shares
* U.S. bank will not be paid for initial work -source
* Top banks on shortlists for advisor, bookrunner roles
* Lloyds sale could start Aug-Sept after share price rally
By Steve Slater
LONDON, July 19 (Reuters) - Britain picked U.S. investment bank JP Morgan to advise it on the sale of stakes in Lloyds and Royal Bank of Scotland, marking another step in a sale which could add billions of pounds to state coffers.
The government's holdings in the two banks date from when they were bailed out with 65 billion pounds ($98.8 billion) of public funds during the credit crunch and finance minister George Osborne is keen to progress the sale before an election due in 2015.
The government is expected to kick off the sale of shares in Lloyds, in which it owns 39 percent, before the end of September if the bank's shares remain above the 61 pence price at which the government bought in.
It is likely to start with a placing of between 3 billion pounds and 5 billion of Lloyds shares with institutional investors, bankers have said.
RBS, in which the state has 81 percent, is a more problematic case, because the shares remain well below the government's breakeven price and its restructuring is less well advanced.
For JP Morgan, it is a prestigious award after what was a hotly contested pitch between investment banks, although it will not be paid for the initial period of work, a person familiar with the matter said.
UK Financial Investments (UKFI), the body which manages the Lloyds and RBS stakes, said on Friday JP Morgan would initially help devise strategies "for realising value for the government's shareholdings in the banks."
UKFI said it will review the appointment on a periodic basis. It also listed more than a dozen banks shortlisted to work on any share sale, which included all of the big names from Wall Street and the City of London.
Lloyds shares were down 1.5 percent at 69 pence by 1300 GMT, underperforming a 0.2 percent rise by Europe's bank sector , but are still up 44 percent this year, fuelled by expectations for a sharp rise in profits and a resumption of dividend payments next year.
Some of JP Morgan's most senior bankers who could work on the deal include Viswas Raghavan, its head of banking for Europe, and the new co-heads of its UK investment banking business: Conor Hillery, who previously ran its UK financial institutions group, and Ina De, previously co-head of equity capital markets for Europe.
There will continue to be a hard-fought battle to run the 20 billion pound sale of Lloyds shares, even though fees on the deal will be far less lucrative than for private sector work.
Given the scale of the sale, banks could still earn 25 million pounds if they charged 0.5 percent on the sale of 5 billion pounds of shares, and share 325 million pounds in fees on the full Lloyds and RBS stake sales - albeit maybe over a decade.
Shortlists were named for four roles: bookrunner, co-lead manager, capital markets adviser, and financial and/or strategic adviser. UKFI will pick banks from the lists at short notice.
Eighteen banks were on the list to advise on strategy, with JPMorgan joined by U.S. rivals Goldman Sachs, Bank of America Merrill Lynch, Citi and Morgan Stanley .
From Europe were Barclays, HSBC, Rothschild, Credit Suisse, UBS and Deutsche Bank.
Six firms were names as potential capital markets advisors, who could help on a retail offer, including Lazard, Portman Capital and Solid Solutions.
JP Morgan, UBS, Credit Suisse and Deutsche Bank all worked closely with the Treasury during the 2008 bailout of the banks. UBS and Bank of America are joint stockbroking advisers to Lloyds and UBS and Morgan Stanley are brokers to RBS.
UKFI has not said how it will structure any sale, and disposing of its RBS stake is not expected to start until late 2014 at the earliest, and could take more than five years.
Fees could be below the usual 0.5 percent for a government sale and maybe as low as 0.1 to 0.2 percent if banks do not take on much risk in taking blocks of stock to sell on. Banks are likely to be sounding out potential "anchor" or cornerstone investors who could take a large chunk of shares.