RBS trading in line, confident on insurance sale

It said it also remained confident of selling its insurance arm for the price it had in mind at the start of an auction, despite speculation tough markets have dampened interest.

Britain's second-biggest bank, which raised 12 billion pounds ($23.5 billion) in the biggest ever rights issue earlier this week, said it was adopting a cautious stance towards risk in the light of jittery markets and economic storm clouds.

However, it said the benefits -- in terms of both income and cost savings -- from last year's purchase of large parts of Dutch group ABN AMRO, were running slightly ahead of target.

"The rights issue removes one overhang and valuation appears attractive," said Bruce Packard, analyst at Pali International. "However, it seems likely that conditions are going to get worse in the real economy banking book, before an improvement comes."

RBS Chief Executive Fred Goodwin said the bank is cautious on prospects, but it "remains very much open for business".

"There's still more bad news than good news, but we're not looking at the end of the world," he told reporters.

A UK housing market downturn is likely to take at least a year to work through, but there were "chinks of light" coming through in capital markets areas that have slowed sharply, he said.

RBS INSURANCE

RBS is seeking to top up its rights issue proceeds with asset sales boosting capital by 4 billion pounds this year.

An auction of RBS Insurance, which includes Direct Line and Churchill brands, had been valued at near 7 billion pounds but may not fetch that much, analysts have said. Four suitors including Zurich Financial Services have put in informal bids, people familiar with the matter have said.

"There are a number of people who would all ostensibly be good owners and capable of paying the price that we're looking for," Goodwin said.

"We had a price in our minds that we were looking for at the start of the process and that hasn't changed. We're determined not to sell this for an undervalue, but at this point that doesn't look like an option that's going to come to pass," he told reporters on a conference call.

The bank expects its core tier 1 capital ratio to be over 5 percent at the end of this month, and above 6 percent by the end of the year, helped by asset sales.

Banks across the world have written down billions of dollars of risky assets following a lockdown in credit markets last summer and have also been scrambling to raise cash and sell assets to repair their balance sheets.

RBS said in April it expected a hit of 5.9 billion pounds before tax from its credit market exposures this year.

RBS's rights issue was aimed at rebuilding one of the most stretched balance sheets among European banks, following its purchase of ABN AMRO assets.

Its shares have tumbled 39 percent this year, steeper than a 26 percent drop by the DJ Stoxx European bank index and cutting its market value to 38 billion pounds.