Last checked at 
* RBS strategy update 'crucial' for investment case
* Capital, future strategy must be tackled before sale
* UKFI accelerated departure of ex-RBS boss Hester
* Restructuring may accelerate sale process-New UKFI head
By Matt Scuffham
LONDON, Nov 12 (Reuters) - Part-nationalised Royal Bank ofScotland must address issues over its capital and futurestrategy before the government can start selling its shares, thenew head of the agency managing Britain's bank stakes toldlawmakers.
James Leigh-Pemberton, who will become executive chairman ofUK Financial Investments (UKFI) in January, said the outcome ofnew RBS Chief Executive Ross McEwan's strategic review, due inFebruary, would be critical in determining whether the bank isattractive to investors.
"There are certain issues in relation to RBS whichabsolutely have to be tackled as a precursor to successfulreprivatisation: sufficient capital; strategic focus onbusinesses where they enjoy competitive advantage and higherreturns and the normalisation of the capital structure,"Leigh-Pemberton told parliament's Treasury Select Committee.
Britain is keen to offload its stakes in RBS andstate-backed Lloyds Banking Group, having pumped acombined 66 billion pounds ($105 billion) into the banks to keepthem afloat in the 2008 financial crisis.
RBS, 81 percent owned by taxpayers, said earlier in Novemberit would create an internal "bad bank" to fence off its riskiestassets, part of a raft of measures designed to heal itsrelationship with the government and speed up its eventualprivatisation.
"The new plan will enable reprivatisation at least on thetimetable that would have been achieved otherwise, and possiblyscope to act a little faster," Leigh-Pemberton said, adding thatit was too early to say when a sale might take place.
Outgoing UKFI chairman Robin Budenberg told the committeethat a sale of the government's shares in RBS had not been aserious prospect at any time in the past two years.
Looking to illustrate UKFI's independence, Budenberg said UKFinance Minister George Osborne had proposed steeper cuts inbankers' bonuses than were "commercially acceptable" at RBS andLloyds, but the agency had intervened to limit the reductions.
RBS chairman Philip Hampton said last year the bank would beready for privatisation in 2014 but admitted earlier in Novemberthe timescale had been pushed back. Industry and politicalsources have said it is likely to take 3 to 5 years.
Budenberg was also questioned over UKFI's role in theousting of RBS's former chief executive, Stephen Hester. He saidRBS's board were already mulling succession plans but UKFI'sintervention accelerated the process. Budenberg said UKFIdiscussed the change with RBS chairman Philip Hampton beforeconsulting Britain's finance ministry.
Andrew Tyrie, chairman of the Treasury Select Committee,said UKFI's mandate to run the banks commercially and at "arm'slength" from the government "needs a lot of qualification,"given the Treasury's involvement in a number of issues.
Britain's financial regulator said in June that RBS had acapital shortfall of 13.6 billion pounds, the biggest of any UKbank. McEwan sees its restructuring plan as part of a process ofreshaping the bank to remove all concerns around its capitalstrength within the next 2 to 3 years.
The bank plans to hold a core capital ratio of about 11percent by the end of 2015 and 12 percent a year later, which is3 percentage points above its current position.
Britain began selling shares in Lloyds at a profit earlierthis year, but a sale of its stake in RBS is much further off,with taxpayers still sitting on a paper loss of 15 billionpounds at current prices. Shares in RBS were down 2.6 percent at1430 GMT, compared with a 0.8 percent decline in the Europeanbanking index.
