Delaysto Royal Bank of Scotland GroupPlc's disposal of Williams & Glyn may push back the prospect ofa return to dividend payments even as the bailed-out bank's underlying businessimproves, RBS management said April 29.

Thebank must also await the outcomes of litigation in the U.S. over its sales ofresidential-mortgage-backed securities and the Bank of England's stress test inthe fourth quarter before it can pay back capital in excess of its targeted 13%common equity Tier 1 ratio, CFO Ewen Stevenson told analysts during a callafter the bank reported a first-quarter attributable loss of £968 million.

Theloss came after the bank recently made a first step toward restoring dividendsby transferring £1.19billion to the U.K. government, which bailed it out for £45 billionin 2008. But delays in separating Williams & Glyn, which will RBS' English and Welshcustomers, from the rest of its business pose a barrier to dividend payments,Stevenson said, although he stressed that this would not affect the amount ofexcess capital that will eventually be paid out to shareholders.

"Asand when we clear the remaining hurdles to being able to return to capitaldistributions we will normalize to a 13% core tier 1 ratio," he told thecall. "So, if you're taking a more conservative view it's a timingdifference rather than a difference in absolute capital distributions.[…] Once we have got [Williams & Glyn] separated we're pretty confidentthat we can come up with a manner of disposal that protects shareholder value."

Yetdelays in selling Williams & Glyn also mean RBS may not meet the Dec. 31,2017, deadline set by the European Commission as a condition for approvingstate aid. Missing the deadline, which has already been extended once, may meanthe financial impact of the divestment on RBS will be "significantlygreater" than previously thought, the bank April 28.

RBSnow runs the risk of a European Commission fine over Williams & Glyn,Haitong Research's Shailesh Raikundlia said in an interview. And Macquarie'sEdward Firth told S&P Global Market Intelligence that the failure to hiveoff Williams & Glynn is particularly disappointing given that it would havebeen possible to set up an entirely new bank in the period since RBS'restructuring plan was approved by the European Commission in 2009.

"Argentinacould go bust and grow again in 10 years, and still Royal Bank will be marchingthrough their restructuring program," Firth said, adding that the bad bankshould have been entirely separated from RBS at the outset of the bailout."They should have put in a runoff and they should have launched a new bankon the Monday, which would have been a clean bank and we could all have got onwith our lives."

Raikundliaadded that the rest of RBS' underlying business was performing well.Underlyingfirst-quarter revenues of £3.15 billion were 5% above consensus estimates dueto retail and commercial banking, he said separately in a research note. Returnon equity in core retail, commercial and investment banking franchises was10.9% in the first quarter, according to RBS.

"They'regoing to have a lot of excess capital at some stage," Raikundlia said."It's just a matter of when they can pay that out."

Butunderlying returns, which factor out volatile items, do not accurately reflectthe state of RBS today, said Firth. RBS' bad bank, its capital resolution unit,made an operating loss of £301 million in the first quarter, although it hasmanaged to run down its risk-weighted assets to £48.4 billion from £90.1billion to the end of March 2015.

RBS'CET1 ratio slid 90 basis points during the quarter to 14.6%, largely due to thepayment to the government.