* Plans to partially sell U.S. arm Citizens in next 2 years
* Batch of 315 UK branches unlikely to be sold, plans float
* RBS to further reduce "scale and scope" of investment bank
* Operating profit 3.5 bln stg, highest for five years
* Shares close down 6.6 percent
By Matt Scuffham and Steve Slater
LONDON, Feb 28 Bowing to political and
regulatory pressure, part-nationalised Royal Bank of Scotland
said on Thursday it will cut down the size of its
already shrunken investment bank and sell off a stake in its
U.S. business Citizens.
Top management also said they were hopeful that the
government would start selling its 82 percent stake next year
but market concerns that the new round of restructuring would
reduce its future growth potential hit the share price.
The shares closed down 6.6 percent at 324 pence, valuing the
bank at just short of 19.7 billion pounds ($30 billion), less
than a third of its 65 billion-pound valuation before its
troubles began six years ago.
"Clearly pressure from (regulator) the FSA to shore up its
capital buffers has forced RBS to announce more restructuring
which is likely to further dilute the future returns potential
at RBS, said Espirito Santo analyst Shailesh Raikundlia.
The businesses earmarked for sale or to be shrunk provide
almost a quarter of the "core" RBS's profits prospects.
Citizens accounted for 12 percent of the core bank's
operating profits last year of 6.3 billion pounds, the
investment bank contributed 24 percent, the batch of 315 UK
branches for sale 5 percent and the Direct Line online
retail insurer floated in October contributed 7 percent.
Britain pumped 45.5 billion pounds into RBS during the 2008
financial crisis in order to keep it afloat, wiping out 90
percent of its value for shareholders. The bank has since shed
around 900 billion pounds worth of assets and is focusing on
lending to British households and small businesses.
The plan to shrink further means RBS's prospects are now
inextricably linked to those of the British economy and Hester
said the economic and regulatory environment would remain tough
"Growth prospects in the UK, the group's most important
market, remain subdued," Hester said.
Hester also said the bank had "accommodated" concerns held
by the regulator and would sell between 20 and 25 percent of
Citizens via a stock market flotation in New York in the next
The bank will also reduce the "scale and scope" of its
investment banking business, which accounted for about 60
percent of operating profits prior to the bailout.
"We believe both these actions will prove negative for
future returns potential," said Espirito's Raikundlia.
RBS reported a pretax loss last year of 5.2 billion pounds,
hit by a 4.6 billion-pound charge for losses on the value of its
own debt. It also set aside a further 450 million pounds to
compensate customers mis-sold payment protection insurance,
taking its total provision to 2.2 billion pounds, and provided
for 700 million pounds to compensate small businesses mis-sold
complex interest rate hedging products.
However, its underlying operating profit nearly doubled to
3.5 billion pounds, the highest level since the bank was bailed
out, and chairman Philip Hampton said the bank was now "much
closer" to being in a position for the government to start
selling shares, believing it was a "reasonable aspiration" that
Britain could start selling in 2014.
The bank still has several obstacles to navigate, however.
It suffered another setback last October when the planned sale
to Santander of 315 UK branches fell through, and said
on Thursday it is now likely to sell them via a flotation on the
London Stock Exchange.
Ordered by the European competition authorities to sell the
branches as a consequence of taking state aid, RBS said it now
expected it would ask for an extension to an end-2013 deadline.
Hester said there were a lack of buyers for UK bank assets
at present, so a share sale using the Williams & Glyn's brand
was now its "baseline" plan.
RBS also said on Thursday it paid out 607 million pounds in
bonuses for 2012, down 23 percent from 2011, after cutting about
302 million pounds from planned bonuses and clawbacks on past
awards as a result of it being fined $612 million over attempts
to manipulate the setting of benchmark interest rates.
Bankers across Europe are now set to have their bonuses
capped under new industry rules agreed in Brussels.
'MAKE IT SMALLER'
Finance Minister George Osborne welcomed RBS's plans to
shrink its investment bank further.
"I want to see RBS as a British-based bank, focused on
serving British businesses and consumers, with a smaller
international investment bank to support that activity rather
than to rival it," he said on Thursday.
Hampton admitted that the bank's relationship with the
government and regulators had at times been strained, even
though the government set up UK Financial Investments to manage
its investments in RBS and Lloyds "at arm's length".
"Nobody would have designed this model," said Hampton.
"Occasionally we have difficult discussions and even more
occasionally we have very fraught discussions about some of