By Matt Scuffham and Steve Slater
LONDON (Reuters) - State-backed British lenders Lloyds Banking Group <LLOY.L> and Royal Bank of Scotland <RBS.L> have agreed plans to shore up their capital with the financial regulator, removing a barrier to the government offloading its shares.
The regulator said on Wednesday it had finalized capital requirements for the two banks and the lenders had submitted their plans. Both banks said they did not need to issue new equity and could raise the necessary capital by selling assets and through their restructurings, which are already under way.
Lloyds moved quickly to plug part of its shortfall by raising about 500 million pounds ($752 million) from the sale of more of its stake in UK wealth manager St.James's Place <SJP.L>.
The banks need to show they are robust enough to return to private ownership after Britain pumped in a combined 66 billion pounds ($100 billion) to rescue them during the 2008 financial crisis. Both have since undertaken major overhauls under new management, involving asset sales and job cuts.
The International Monetary Fund told Britain on Wednesday to get a "clear strategy" on returning its Lloyds and RBS stakes to private ownership and Finance Minister George Osborne said he agreed, in one of his clearest statements of intent yet on getting the banks off the government's books.
"Having refocused their business, now is the time for a clear strategy on how to return RBS and Lloyds to the private sector in a way that protects value for the taxpayer," he said.
Osborne indicated he would await the final recommendations of the Parliamentary Commission on Banking Standards, due to be made next month, before formulating plans.
Speculation that a sale of Lloyds shares may be imminent has risen in recent weeks after the bank's shares passed the 61.2 pence level which the government regards as break-even on its 20.5 billion pound investment.
A sale of shares in RBS would appear to be further away with taxpayers still sitting on a loss of over 5 billion pounds following the bank's 45.8 billion bailout. However, the government may consider other options such as a mass share distribution to the public.
The Bank of England said in March that Britain's banks must raise 25 billion pounds of extra capital by the end of the year to absorb any future losses on loans and said the Prudential Regulation Authority (PRA) would give banks specific guidance on their capital position by the end of May.
Industry sources and analysts had identified Lloyds and RBS as most likely to need extra capital. Lloyds was seen facing a shortfall of up to 5 billion pounds and RBS as much as three times that amount.
Neither the banks nor the PRA would confirm how much extra capital the banks needed. Shares in Lloyds closed up 2.3 percent at 63p and RBS gained 2.2 percent to 349.6p.
Lloyds, which is 39 percent-owned by the taxpayer, said it would not need to issue new equity or so-called contingent capital, which can convert into equity if a bank hits trouble.
It said after the market close it will sell 77 million shares in St.James's Place, or a 15 percent stake in the firm, which will cut its holding to 21 percent. It cannot sell those shares for 180 days.
The sale will increase its common equity Tier 1 capital by about 500 million pounds and add 0.16 percentage points to its core capital adequacy ratio. The ratio was 8.1 percent at the end of March under full Basel III rules and the bank said that should rise to above 9 percent this year.
Lloyds, which was informed of the PRA's conclusions by letter this week, has also hired advisers for the possible sale of its Scottish Widows asset management arm, and said capital will also be built by cash generated by its core business.
RBS, which is 81 percent-owned by taxpayers, has more to do.
The bank said it expected to improve its capital position and meet regulatory requirements through its current business plan. But it warned it would not be able to implement all of the measures this year.
RBS is reducing the size of its investment bank, selling non-core assets and plans to sell 20-25 percent of U.S. arm Citizens in the next two years through a stock market flotation in New York.
The PRA said it would release more information when it had concluded discussions with all banks. The other major UK banks are not expected to need capital and all generate significant profits. HSBC <HSBA.L> and Standard Chartered <STAN.L> are regarded as among the best capitalized banks in the world and Barclays <BARC.L> and Santander UK <SAN.MC> have said they are comfortable with their strength.
Britain's biggest customer-owned financial services group Nationwide said on Wednesday it planned to raise a "few hundred million" pounds in the next year to bolster its capital through the issue of new loss-absorbing debt.
($1=0.6647 British pounds)
(Editing by Mark Potter and Greg Mahlich)