* Lloyds hires Deutsche Bank to advise on sale
* Analysts say sale could raise 800 mln stg
* Move seen as a response to FPC review of capital
* Banks awaiting clarity over capital shortfall
By Matt Scuffham
LONDON, April 19 (Reuters) - British bank Lloyds has hired advisers for the possible sale of its Scottish Widowsasset management arm, as it prepares for a likely regulatorydemand to raise more capital, sources said.
UK banks are having to consider further disposals after theBank of England said they must raise a total of 25 billionpounds ($38 billion) of extra capital by the end of the year, tobe in a position to absorb future loan losses.
Industry sources and analysts say Lloyds Banking Group Plc, heavily exposed to the UK housing market where prices havedeclined in some parts of the country and whose capital has beendented by the cost of compensating customers for mis-selling, isone of the banks facing a shortfall, which could be in theregion of 3 billion pounds.
Lloyds has hired Deutsche Bank to advise on thepossible sale, sources familiar with the matter said on Friday.But they stressed a formal sale process had not yet begun andthat Scottish Widows' insurance business was not up for sale.
Lloyds and Deutsche Bank declined to comment.
The bank's Scottish Widows Investment Partnership (SWIP),which provides asset management services to both internal andexternal clients, is a candidate for disposal because suchbusinesses have been struggling to hold on to investors' cash asthe popularity of passively managed alternatives has risen.
SWIP had 141.7 billion pounds under management at the end of2012.
"A decision to sell SWIP is likely to have been taken inresponse to the outcome of the recent FCA review into bankcapital," said analyst Gary Greenwood at brokerage ShoreCapital, referring to the newly established Financial ConductAuthority whose remit is to police the financial stability ofBritain's banks.
Greenwood said the sale would bolster Lloyds' capitalposition while having a limited impact on profitability.
CAPITAL NEEDS
Analysts estimate a sale could raise around 800 millionpounds and increase Lloyds' core Tier 1 capital by about 20basis points. The ratio stood at 12 percent at the end of 2012,or 8.1 percent after factoring in the impact of Basel III ruleson its risk-weighted assets (RWA).
Uncertainty over Lloyds' future capital requirements is adistraction for Chief Executive Antonio Horta-Osorio as heoversees the bank's recovery after the government pumped in 20.5billion pounds to keep it afloat during the 2008 financialcrisis, leaving taxpayers with a 39 percent stake.
The bank has reduced its loan book, cut costs and reined inbad debts. Its shares enjoyed a strong run in the early part of2013, hitting a near two-year high of 56 pence and closing in onthe 61p level which the government regards as its break-evenprice, raising hopes it might achieve a sale.
But the shares have subsequently dropped back amiduncertainty over the extent of its capital shortfall and whatmeasures it must take to address it.
The stock was trading up 0.1p at 47p by 1416 GMT.
One senior banking executive told Reuters he regarded thecurrent level of regulatory uncertainty as "bizarre".
Expected meetings between individual banks and the regulatorin April to discuss their capital requirements have not yetmaterialised, the executive told Reuters, effectively leavingthem in limbo until the situation is clarified. Regulatorysources insist the timetable is on track, however.
Lloyds has already taken a number of steps to bolster itscapital. The bank is continuing to sell non-core loans - thosedeemed to not fit with long-term strategy - and is in theprocess of selling 632 branches to the Co-Op, although the dealhas been plagued by complications.
The bank sold a 20 percent stake in wealth manager St.James's Place Plc for 520 million pounds last month, butagreed not to sell its remaining 37 percent for at least a year.
Lloyds is keen to restore dividend payments, seen as a keymilestone on the path towards re-privatisation, but will needapproval from the regulator to do so.
$1 = 0.6539 British pounds)
Lloyds (LLOY)