By Matt Scuffham
LONDON (Reuters) - Britain is planning to sell half its stake in Royal Bank of Scotland (RBS.L), worth 16 billion pounds ($25 billion), within two years of a possible first sale in September, sources with knowledge of government thinking told Reuters.
Finance Minister George Osborne has indicated that he wants to begin reducing the government's 32 billion pound stake in the coming months, but the sources said the shares will be sold at a faster rate than previously expected, making it likely the government will take a substantial loss on the initial sales.
Final decisions on Britain's biggest privatization have yet to be made and progress will depend upon RBS's performance, market conditions and ongoing investigations into past misconduct, the sources said.
Britain pumped 45.8 billion pounds into RBS to rescue the bank during the 2007/09 financial crisis, leaving the government with a 78 percent stake. At current share prices the government is sitting on a loss of 14 billion pounds.
RBS Chairman Philip Hampton, who is leaving the bank this year, and former CEO Stephen Hester had both said previously that it could take several years for RBS to return to private ownership, given the amount of shares to be sold.
Although Osborne had been reluctant to sell at a loss, the bank's improving performance and the increased political leeway afforded by the Conservative party's majority election victory in May have persuaded him now is the time to sell.
The finance ministry declined to comment on whether Osborne will talk about an RBS stake sale when he delivers Britain's Budget on Wednesday, the first since May's election victory.
Boosting the chances of a faster than expected RBS privatization is a British and Irish economic recovery that has enabled the lender to recover debts it had previously written off and to lift operating profit by 16 percent in the first quarter.
The RBS revival has attracted interest from investors looking to benefit from Britain's economic recovery, including many in the United States, banking sector sources said.
Analysts expect the bank to have surplus capital by the end of 2016, offering the prospect of a high dividend yield in the longer term.
"Investors are really keen. They understand what RBS wants to be," one investment banker told Reuters. "They are prepared to sit and wait. Pay up now for the prospect of a dividend in two to three years."
RBS, which briefly became the world's biggest bank after an acquisition binge under former CEO Fred Goodwin, has undergone a complex restructuring to focus on lending to British households and businesses.
The turnaround, however, has taken far longer than that of state-backed rival Lloyds Banking Group (LLOY.L), which the government is selling at a profit en route to a planned return to full private ownership next year.
A first sale of RBS shares to financial institutions such as pension funds and insurers is earmarked for September and could raise about 1.5 billion pounds, one of the sources said.
Yet significant challenges could still upset the plans. The biggest could be RBS's impending settlement in the United States relating to the mis-selling of mortgage-backed securities. Court documents filed last month suggested it could have to pay $13 billion to settle the claims..
RBS must also pay the Treasury a further 1.18 billion pounds to cancel an arrangement that gives the government priority over dividends.
Shares in the bank were down 2.9 percent on Monday, in line with the European banking sector's decline after Greeks overwhelmingly rejected a rescue package from the country's creditors.
(Editing by David Goodman)