LONDON British bank Lloyds (LLOY.L) has hired advisers for the possible sale of its Scottish Widows asset management arm, as it prepares for a likely regulatory demand to raise more capital, sources said.
UK banks are having to consider further disposals after the Bank of England said they must raise a total of 25 billion pounds ($38 billion) of extra capital by the end of the year, to be in a position to absorb future loan losses.
Industry sources and analysts say Lloyds Banking Group Plc, heavily exposed to the UK housing market where prices have declined in some parts of the country and whose capital has been dented by the cost of compensating customers for mis-selling, is one of the banks facing a shortfall, which could be in the region of 3 billion pounds.
Lloyds has hired Deutsche Bank (DBKGn.DE) to advise on the possible sale, sources familiar with the matter said on Friday. But they stressed a formal sale process had not yet begun and that Scottish Widows' insurance business was not up for sale.
Lloyds and Deutsche Bank declined to comment.
The bank's Scottish Widows Investment Partnership (SWIP), which provides asset management services to both internal and external clients, is a candidate for disposal because such businesses have been struggling to hold on to investors' cash as the popularity of passively managed alternatives has risen.
SWIP had 141.7 billion pounds under management at the end of 2012.
"A decision to sell SWIP is likely to have been taken in response to the outcome of the recent FCA review into bank capital," said analyst Gary Greenwood at brokerage Shore Capital, referring to the newly established Financial Conduct Authority whose remit is to police the financial stability of Britain's banks.
Greenwood said the sale would bolster Lloyds' capital position while having a limited impact on profitability.
Analysts estimate a sale could raise around 800 million pounds and increase Lloyds' core Tier 1 capital by about 20 basis points. The ratio stood at 12 percent at the end of 2012, or 8.1 percent after factoring in the impact of Basel III rules on its risk-weighted assets (RWA).
Uncertainty over Lloyds' future capital requirements is a distraction for Chief Executive Antonio Horta-Osorio as he oversees the bank's recovery after the government pumped in 20.5 billion pounds to keep it afloat during the 2008 financial crisis, leaving taxpayers with a 39 percent stake.
The bank has reduced its loan book, cut costs and reined in bad debts. Its shares enjoyed a strong run in the early part of 2013, hitting a near two-year high of 56 pence and closing in on the 61p level which the government regards as its break-even price, raising hopes it might achieve a sale.
But the shares have subsequently dropped back amid uncertainty over the extent of its capital shortfall and what measures it must take to address it.
The stock was trading up 0.1p at 47p by 1416 GMT.
One senior banking executive told Reuters he regarded the current level of regulatory uncertainty as "bizarre".
Expected meetings between individual banks and the regulator in April to discuss their capital requirements have not yet materialised, the executive told Reuters, effectively leaving them in limbo until the situation is clarified. Regulatory sources insist the timetable is on track, however.
Lloyds has already taken a number of steps to bolster its capital. The bank is continuing to sell non-core loans - those deemed to not fit with long-term strategy - and is in the process of selling 632 branches to the Co-Op, although the deal has been plagued by complications.
The bank sold a 20 percent stake in wealth manager St. James's Place Plc (SJP.L) for 520 million pounds last month, but agreed not to sell its remaining 37 percent for at least a year.
Lloyds is keen to restore dividend payments, seen as a key milestone on the path towards re-privatization, but will need approval from the regulator to do so.
(Editing by Sinead Cruise and David Holmes)