Shares in embattled Royal Bank of Scotland (LON:RBS) took off in early trade after it announced the surprise £4.7 billion sale of its Aviation Capital business to a consortium led by Sumitomo Mitsui Financial Group of Japan. 

The proceeds will further strengthen its balance sheet, and in particular the group’s core tier 1 capital position. 

RBS finance director, Bruce Van Saun, said: "Reaching agreement on a deal of this scale in such a volatile market is a significant success for our non-core division and a credit to SMBC. 

“This transaction further evidences our progress in reducing our non-core portfolio and returning the group to a position of strength."

 The business, which has been profitable since inception, is headquartered in Dublin, and employs 69 in Ireland and eight other locations in Europe, the US and Asia. 

It currently owns 206 aircraft and has commitments to purchase a further 87 by 2015. Its assets are worth £4.6 billion.

The state-owned bank is in the midst of a disposal and cost-cutting programme designed to restore the business to profitability ahead of its return to the private sector.

Last week announced plans to cut 3,500 jobs as part of a major restructuring of its investment banking operations.

At 8.26, the stock was up 1.09 pence, or 4 per cent, at 25.51 pence.

The stock gained nearly 7% in early deals on the London Stock Exchange today after the part nationalised bank confirmed it intends to sell or close its loss making investment banking operations.

Over the next three years RBS wants to exit its cash equities, corporate broking, equity capital markets and mergers and acquisition businesses.

The remaining investment banking business will be split into two sides, markets and international banking. These business units will focus on the banks strengths, it said.

The continuing business areas will include fixed income, foreign exchange, debt financing, transactions services and risk management solutions. 

The restructuring is expected to lead to 3,500 job cuts, on top of the 2,000 announced in December. RBS says the changes will provide significant reductions in its balance sheet, funding requirements and cost base.

The bank claims that going forward it will be more customer focused, more conservatively funded and more efficient. It also believes the changes will provide more stable returns for shareholders.

“The changes we are announcing today seek to ensure that RBS is at the front of the pack in pursuing a strategy that reflects the environment we expect to operate in,” said chief executive Stephen Hester.

At 8:55 am on the London Stock Exchange RBS shares were up 1.51p, or 6.9%, trading at 23.3p each.

The cuts would affect more than half of the 19,000 staff at RBS’s investment bank and are part of plans being drawn up by chief executive Stephen Hester to scale back the division drastically, the FT reported.

The bank recently appointed Lazards to find a buyer for stockbroker subsidiary Hoare Govett and the equities operations in the US and Australia.

Today’s report suggested it is also poised to pull back from wider European investment banking to focus just on London, Paris and Frankfurt. 

The possible restructuring would cost between £1bn-£2bn, although is still said to be considered a worst case scenario in the event that RBS cannot dispose of the operations concerned.

Once the restructuring is complete, RBS will focus on its traditional UK retail and corporate financing bank activities. Analysts expect more details to be disclosed on 23 February along with RBS’s annual results.

Only last month, UK chancellor George Osborne told the 83% UK taxpayer-owned bank that it needed to scale back on its risk exposure.

Oriel Securities said the job cuts were double the previously rumoured 5,000 reduction, but given the chancellor’s remarks, the impact of the capital requirements of Basel III and the Independent Commission on Banking’s recommendation on ring-fencing, RBS has little choice but to reduce substantially the size of its investment bank business.

Lloyds stunned investors three weeks ago when it announced chief executive Antonio Horta-Osorio was to take temporary leave due to fatigue.

The group appointed chief finance officer Tim Tookey to take over on an interim basis even though he is due to leave in February.

Swiss broker UBS today said that while the management issues are unhelpful for sentiment, it will have little impact on the cash flows and franchise that underpins the Lloyds investment case.

The shape of Lloyds in 10 years may be influenced by whether Mr Horta-Osorio returns to work, the broker said, and who replaces him if he does not, but for the next three years the direction is clear.

This will involve a run-down of the non-core business, improving returns on equity and the return of dividends, all of which should catalyse significant share price appreciation argues UBS.

This upbeat message is despite the broker increasing loss estimates for the non-core division to reflect lower income assumptions in the wholesale non-core division as assets are run down.

UBS also disagrees with the market view that Lloyds’ non-core portfolio is £151 billion of “bad stuff” and that losses here will rise sharply as the economy deteriorates.

It suggests that the idiosyncratic risk has been now largely identified and the non-core loan book may generate value for shareholders over the course of its run-down.

UBS has a core value for Lloyds of 55 pence per share and a 'buy' rating.

Citgroup is also a buyer and expects the bank soon to conclude a sale of 632 branches put up for sale to meet European Union rules.

Lloyds is said to be in discussions with two possible bidders, Co-op and NBNK, which have reportedly made offers in the region of £1.5 billion.

This would be the equivalent of 0.9 times book value, broadly in line with the price Virgin Money paid for Northern Rock recently, and which could result in modest overall capital relief for Lloyds said the broker.

Lloyds shares today rose by three per cent to 23.1 pence.

Barclays Bank (LON:BARC) announced this morning that it has agreed to sell its management buy-out business, Barclays Private Equity, to the management team that runs it.

The management team plans to re-launch the business as Equistone Partners Europe. Equistone will continue to manage its existing three funds on behalf of existing investors, while Barclays remains an investor alongside those funds and remains the largest single investor in Equistone’s investments to date.

The value of the gross assets disposed of is expected to be approximately £45 million. The transaction is not expected to have a material impact on Barclays’ earnings per share or capital ratios.

Shares in Barclays were higher by 1.8 per cent at 173 pence each in early trading this morning.

Shares in Lloyds Banking Group (LON:LLOY) were higher by eight per cent at 29.9 pence each in mid-morning trading this morning after it reported what it said was “a resilient underlying trading performance” for its first nine months of the year.

Lloyds’s core profit before tax was £4.4 billion for the period, although a £3.2 billion provision for payment protection insurance helped to turn this into a loss before tax of £3.9 billion.

Total income, before volatility effects and other provisions, decreased by nine per cent to £16.1 million – which Lloyds said reflected subdued lending demand, continued customer deleveraging and a lower banking net interest margin.

“Although the UK economic environment has weakened in the third quarter, the flexibility in our strategic plan has allowed us to further improve our customer propositions, continue the reduction in our risk profile, strengthen our balance sheet and reduce costs,” said Tim Tookey, the bank’s group finance director and acting chief executive. “Over time, we believe our strategy will realise the full potential of our organisation for customers and shareholders.'

António Horta-Osório, Lloyds’ chief executive, was grAnted a temporary leave of absence due to illness earlier this month. He is expected to return by the end of the year.

Royal Bank of Scotland Group (LON:RBS) reported this morning that its operating profit for the first nine months of this year was greater by 15 per cent than for the same period last year.

However, while the first nine months’ operating profit was £2.1 billion (2010: £1.9 billion) the bank’s Q3 2011 operating profit was just £267 million compared with £726 million in Q3 2010.

But shares in the bank responded by gaining 4.7 per cent to hit 23.9 pence in early trading this morning. 

RBS maintained that it had successfully focused on keeping a strong balance sheet during a “volatile and uncertain macroeconomic environment experience in the third quarter”. It said that capital, funding and liquidity metrics improved and remain robust, while conceding that the decline in its core operating performances reflected a challenging quarter in its Global Banking & Markets division, where the bank expects difficult markets to continue during the current quarter.

On the plus side, the bank said that its Retail & Commercial businesses maintained their income in the quarter and that year-to-date profits for these businesses were up nine per cent.

Overall, group income for the third quarter was £6.3 billion (Q3 2010: £7 billion), which was down 18 per cent compared with the previous quarter. The bank’s balance sheet fell by £16 billion during the quarter, although this was partially offset by an increase of £15 billion within the bank’s group treasury due to a planned increase in the liquidity pool. The Core Tier 1 ratio (a measure of a bank’s financial strength) improved to 11.3 per cent.

Shares in Lloyds Banking Group (LON:LLOY) and Royal Bank of Scotland Group (LON:RBS) dropped this afternoon after Fitch Ratings downgraded the two high street banks’ creditworthiness.

By 3:11pm Lloyds was down 4.7 per cent at 34.5 pence, while RBS was down 3.6 per cent at 24.9 pence.

Echoing the downgrades made to the two banks by rival credit rating agency Moody’s Investors Service last week, Fitch said that the dynamics of state support for the banks have changed, and that there is an “advanced political will” to reduce implicit support for the UK’s banks after proposals made last month by the Independent Commission on Banking.

Lloyds and RBS were both downgraded two ‘notches’ to A from AA- by the credit rating agency. 

Fitch also placed Barclays (LON:BARC) on “negative watch”, pointing out that although its rating does not factor in government support its business model is sensitive to market sentiment, which exposes it to greater volatility. However, Barclays dodged a downgrade this time on account of its strong UK franchise, broad business mix and robust profitability among other factors.

Shares in Barclays were down 5.3 per cent at 177 pence each this afternoon.

Only last week Moody’s said it had downgraded the senior debt and deposit ratings of 12 UK financial institutions after it reassessed the support environment in the UK. It downgraded Lloyds by one notch to A1 from Aa3 and RBS by two notches to A2 from Aa3.

Shares in Royal Bank of Scotland Group (LON:RBS) recovered some lost ground in early trading this morning after opening down sharply following credit rating agency Moody’s downgrading of 12 UK banks due to “the withdrawal of implied government support from the banking sector”.

The shares traded as low as 23.03 pence each very early on, but a statement released at 8:22am by RBS saw them recover to 24.02 pence – still 1.4 per cent down on the day.

RBS said that although RBS is among the banks to be downgraded, “Moody’s has affirmed the group’s standalone rating and confirmed that the action does not reflect any deterioration in the financial strength of the UK banking system”.

The bank added: “RBS has made significant progress in strengthening its credit profile since 2008. As at June 30 2011, we have improved the group’s loan to deposit ratio from 154 per cent to 114 per cent, liquidity reserves of £155 million exceeded short-term wholesale funding of £148 billion, non-core assets reduced by 57 per cent from £258 billion to £113 billion and the core Tier 1 capital ratio was a robust 11.1 per cent. This progress has been recognised by both Standard and Poor’s and Fitch Rating Services, who have both upgraded RBS’s standalone rating by two notches in the past 18 months.”

RBS added that it was disappointed the Moody’s has not acknowledged progress the bank has made in strengthening its credit profile but that it did see the removal of implicit government support for the UK banking sector as being “a necessary and important step forward as the sector returns to standalone strength”.

Yesterday, shares in Lloyds as well as Barclays (LON:BARC), HSBC Holdings (LON:HSBA) and Royal Bank of Scotland Group (LON:RBS) were largely unmoved by the close of the day. As expected, the Independent Commission on Banking final report recommended the implementation of a retail ring-fence in order to “isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers in order to ensure, first, that this provision is not threatened as a result of activities which are incidental to it and, second, that such provision can be maintained in the event of the bank’s failure without government solvency support”.

J P Morgan Cazenove commented that the ICB’s final report provided more clarity but was “still costly for UK domestics”. The investment bank said that increased capital requirements would mean an average dilution of 25 per cent in forecast 2014 earnings per share for UK domestic banks. It added that while the impact falls to 15 per cent for UK domestic banks by the recommended January 1 2019 implementation date, it believes that the market will start discounting well ahead of then.

The greatest 2014 forecast EPS impact, as far as J P Morgan’s forecasts are concerned, will be 30 per cent for Barclays, followed by RBS at 24 per cent and Lloyds at 21 per cent. “HSBC remains least impacted at only two per cent EPS impact and we reiterate our preference for HSBC,” it said.

UBS was sceptical about the need for the ICB’s recommendations. “The problem of demanding that ‘something must be done’ is that something will be, even if the right answer has already been embraced,” said its banking analyst Alastair Ryan. “For the UK banks, recapitalised, refunded and restructured, the ICB’s proposals certainly fit into the ‘something’ category.”

He went on: “We reject the notion that entities ‘outside’ a ring fence will see higher costs of funding purely because of the removal of some subsidy. Rather, businesses outside a ring fence are likely to be regarded by the market as structurally subordinated to those within it. Subordination imposes costs both in the expense and reliability of wholesale funding. This subordination demand relocation. In essence, we view the ICB as accepting the City, but requiring it not to be British-owned.”

As far as the individual banks are concerned, UBS said its first take suggests that “Barclays is incentivised to break itself up; RBS to shrink materially further; and HSBC to leave”. But the Swiss investment bank believes that Lloyds should be “the best positioned remaining UK bank”, while Standard Chartered may escape the unnecessary demands of the ICB.

In a separate statement today, Canaccord Financial Inc said it has decided not to make a firm offer for Evolution. It had confirmed in mid-August that it was in preliminary talks regarding a potential offer for the entire share capital.

Investec has reduced its target price for Lloyds Banking Group (LON:LLOY) and Royal Bank of Scotland Group (LON:RBS), but the investment bank said that its latest figures for Lloyds were based on “deliberately harsh” impairment estimates and it hopes “to have found a floor from which we can upgrade going forward”.

In a research note covering UK banks released earlier today, Investec said that UK bank share prices suggest the market anticipates further “material cuts to consensus and, in some cases, suggest rescue recapitalisations”.

While Investec does not think the level of apparent distress implied in equity prices is consistent with the metrics it observes in interbank funding markets, emergency central bank lending facilities and sovereign CDS (credit default swap) markets,  it believes that single-name bank CDS prices do suggest an institution is in distress. “We may not be able to see either a corpse or a smoking gun with prints on, but the market is sure it can smell cordite,” said the bank.

Investec has concluded that the sharp August sell off seems to be more closely correlated with US Treasury yields, which collapsed, rather than peripheral sovereign CDS, which narrowed. “While the steady rise in peripheral European CDS dovetails nicely with the sector’s underperformance over the course of 2011 as a whole, the August move in particular seems driven by the Fed’s comments in late July on likely interest rates,” it added. “To this end, Fed statements around the possibility of QE3 might, via the treasury yield, impact the sector going forward.”

Investec said that it is holding its estimates for Standard Chartered (LON:STAN) and Barclays (LON:BARC), it was upgrading HSBC (LON:HSBA) while reducing estimates for RBS and Lloyds.

The broker has upgraded its HSBC net income estimates for 2012 to US$24.3 billion from US421.6 billion and trimming its 2013 estimate to US$24 billion from US$24.25 billion, pointing out that these estimate changes factor in the impact of the disposals of the US cards and US retail businesses. “HSBC remains our top pick within the sector,” said the bank. “We continue to view it as offering an asymmetric risk reward profile given the returns-focused restructuring strategy, a high and rising dividend yield and a strong liquidity and capital adequacy profile.”

Net income estimates for Lloyds have been changed from a profit of £1.03 billion to a loss of £1.97 billion for 2011 and from £3.4 billion to £1.38 billion for 2012. “While these downgrades appear material, we acknowledge we were high in the range and had let our estimates go stale,” it said. “Our target price moves down from 69 pence to 32 pence as a result of the material change in both our book value and [return on equity] estimates.”

After also reducing its net income forecast for RBS, Investec reduce its target price for the banks shares from 57 pence to 47 pence.

Today shares in Lloyds and RBS closed at 35.5 pence and 25.9 pence respectively.