British Bank Likely to Scrap Sale of Insurance Unit DEALTALK

By Clara Ferreira-Marques and Steve Slater

Royal Bank of Scotland looks increasingly likely to shelve plans to sell its insurance arm and turn instead to smaller deals to strengthen its capital base.

RBS announced plans in April to sell RBS Insurance, the largest car insurer in Britain. But trading conditions have deteriorated and the top prospects have pulled out, leaving the bank with the unpalatable prospect of selling an attractive asset at a steep discount to its target price of about pound(s)7 billion, or $14 billion.

The outcome, bankers and analysts say, could be scrapping the sale, which RBS was never enthused about anyway.

"It looks now as if there is a less than a 50 percent chance they will sell the business," said Leigh Goodwin, analyst at Fox-Pitt Kelton. "If they didn't get the right price from Zurich, why would they get a better price from Allstate?"

Zurich Financial Services had been seen as the front-runner to buy the insurance arm of RBS but pulled out last month, leaving Allianz of Germany and the American company Allstate as the last serious bidders, people with direct knowledge of the matter have said. Travelers Insurance has also been named as a potential buyer, though the same people say its interest has cooled.

"Clearly RBS would have liked the flexibility," Goodwin said. "But most investors would rather they didn't sell the business in a forced sale. It's not as if it's a bad business, and selling it would be dilutive to earnings."

RBS, the second-largest British bank after HSBC, said in April that it was targeting a core tier 1 ratio - a measure of a bank's ability to cover losses - of more than 6 percent at the end of this year, taking on a bigger capital cushion than in the past to protect it in more turbulent market conditions.

That target, however, includes both the bank's pound(s)12 billion rights issue, completed last month, and a pound(s)4 billion increase in capital from asset disposals, most of that from the sale of RBS Insurance.

Its core tier 1 ratio was less than 5 percent before the fund- raising, one of the lowest in the industry; its purchase of parts of ABN AMRO and big write-downs had stretched an already tight balance sheet.

RBS said in April that there was scope for "fewer disposals" while still meeting its capital ratio target. Several smaller assets are still on the block.

Exane BNP Paribas estimates that smaller deals could add up to about pound(s)1 billion in gains, leaving RBS just shy of its 6 percent target.

It will have even more options open in 2009, when it will be able to sell its 5 percent stake in Bank of China, currently worth about $7 billion.

"Even without a sale of Direct Line, we think RBS can get jolly close to its new 6 percent target," BNP analysts said, referring to a car insurance brand owned of RBS Insurance.

Adding to the sale of Angel Trains last month, which increased capital by pound(s)250 million to pound(s)300 million, RBS is expected to sell ABN AMRO units in Australia and New Zealand, worth about pound(s)400 million, in the coming weeks, despite the exit of one high-profile bidder, National Australia Bank.

RBS may also sell its Spanish insurance joint venture, which could be broken out from its broader insurance unit.

It may also soon reach a deal to offload its half share in Tesco Personal Finance, its venture with the British retailer, which is expected to fetch about pound(s)1 billion, an pound(s)800 million capital gain.

In both cases, the stakes are expected to be sold to the joint venture partners, Bankinter and Tesco.

All of these would be dwarfed, however, if the bank did sell RBS Insurance. A price tag of pound(s)6 billion, which is below the target price set by RBS, would result in a capital gain of pound(s)2.7 billion, increasing the core tier 1 ratio by 0.51 percentage point, analysts at the brokerage firm Cazenove have estimated.

But that now looks increasingly difficult.

Originally published by Reuters.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.

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