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* JPMorgan to help devise strategy for Lloyds, RBS shares
* U.S. bank will not be paid for initial work -source
* Top banks on shortlists for advisor, bookrunner roles
* Lloyds sale could start Aug-Sept after share price rally
By Steve Slater
LONDON, July 19 (Reuters) - Britain picked U.S. investmentbank JP Morgan to advise it on the sale of stakes inLloyds and Royal Bank of Scotland, markinganother step in a sale which could add billions of pounds tostate coffers.
The government's holdings in the two banks date from whenthey were bailed out with 65 billion pounds ($98.8 billion) ofpublic funds during the credit crunch and finance ministerGeorge Osborne is keen to progress the sale before an electiondue in 2015.
The government is expected to kick off the sale of shares inLloyds, in which it owns 39 percent, before the end of Septemberif the bank's shares remain above the 61 pence price at whichthe government bought in.
It is likely to start with a placing of between 3 billionpounds and 5 billion of Lloyds shares with institutionalinvestors, bankers have said.
RBS, in which the state has 81 percent, is a moreproblematic case, because the shares remain well below thegovernment's breakeven price and its restructuring is less welladvanced.
For JP Morgan, it is a prestigious award after what was ahotly contested pitch between investment banks, although it willnot be paid for the initial period of work, a person familiarwith the matter said.
UK Financial Investments (UKFI), the body which manages theLloyds and RBS stakes, said on Friday JP Morgan would initiallyhelp devise strategies "for realising value for the government'sshareholdings in the banks."
UKFI said it will review the appointment on a periodicbasis. It also listed more than a dozen banks shortlisted towork on any share sale, which included all of the big names fromWall Street and the City of London.
Lloyds shares were down 1.5 percent at 69 pence by 1300 GMT,underperforming a 0.2 percent rise by Europe's bank sector, but are still up 44 percent this year, fuelled byexpectations for a sharp rise in profits and a resumption of dividend payments next year.
HARD FOUGHT
Some of JP Morgan's most senior bankers who could work onthe deal include Viswas Raghavan, its head of banking forEurope, and the new co-heads of its UK investment bankingbusiness: Conor Hillery, who previously ran its UK financialinstitutions group, and Ina De, previously co-head of equitycapital markets for Europe.
There will continue to be a hard-fought battle to run the 20billion pound sale of Lloyds shares, even though fees on thedeal will be far less lucrative than for private sector work.
Given the scale of the sale, banks could still earn 25million pounds if they charged 0.5 percent on the sale of 5billion pounds of shares, and share 325 million pounds in feeson the full Lloyds and RBS stake sales - albeit maybe over adecade.
Shortlists were named for four roles: bookrunner, co-leadmanager, capital markets adviser, and financial and/or strategicadviser. UKFI will pick banks from the lists at short notice.
Eighteen banks were on the list to advise on strategy, withJPMorgan joined by U.S. rivals Goldman Sachs, Bank ofAmerica Merrill Lynch, Citi and Morgan Stanley.
From Europe were Barclays, HSBC,Rothschild, Credit Suisse, UBS andDeutsche Bank.
Six firms were names as potential capital markets advisors,who could help on a retail offer, including Lazard,Portman Capital and Solid Solutions.
JP Morgan, UBS, Credit Suisse and Deutsche Bank all workedclosely with the Treasury during the 2008 bailout of the banks.UBS and Bank of America are joint stockbroking advisers toLloyds and UBS and Morgan Stanley are brokers to RBS.
UKFI has not said how it will structure any sale, anddisposing of its RBS stake is not expected to start until late2014 at the earliest, and could take more than five years.
Fees could be below the usual 0.5 percent for a governmentsale and maybe as low as 0.1 to 0.2 percent if banks do not takeon much risk in taking blocks of stock to sell on. Banks arelikely to be sounding out potential "anchor" or cornerstoneinvestors who could take a large chunk of shares.
