LONDON (Reuters) - Britain is unlikely to sell any more of its remaining 25 percent stake in Lloyds Banking Group (>> Lloyds Banking Group PLC) until the bailed-out lender is cleared to pay dividends again, banking and political sources told Reuters.

Without regulatory approval to pay dividends, Lloyds shares are not expected to rise to a level that would enable UK Financial Investments (UKFI), which manages the government's stakes in bailed-out banks, to convince Britain's finance ministry that a sale would be in taxpayers' best interests.

In contrast, the chances of a first sale of part of the government's 79 percent stake in the other big British bank partly nationalised during the 2007-2009 financial crisis, Royal Bank of Scotland (>> Royal Bank of Scotland Group plc), have risen this year. A sale of some RBS shares is now seen as a possibility within the next two years, the sources said.

Britain raised 7.4 billion pounds through two separate sales of Lloyds shares to pension funds and insurers in September 2013 and March 2014. These were priced at 75 pence and 75.5 pence per share, above the 73.6 pence which the government paid when it pumped 20.5 billion pounds into Lloyds to prevent it from failing during the crisis.

The government would not want to sell shares at a price below that achieved in the first two sales, according to banking and political sources. The first two were priced at discounts of 3 percent and 4.6 percent to the market price and a similar discount would also be expected on the next sale.

That means shares in Lloyds, up 0.3 percent to 75.5 pence at 14:20 p.m. BST on Thursday, would need to be trading at around 80 pence or above. And that is unlikely without the lure of a dividend, the sources said.

"What gets you there is the dividend. It's hard to see at the moment how else you get sufficient momentum," one source involved in the sale process told Reuters.

Government hopes of returning Lloyds to full private ownership before the next election in May 2015, seen as a milestone in Britain's economic recovery, were dashed by a fall in its shares.

However, a sale of around a quarter of the government's remaining shares would still be possible ahead of the vote if Lloyds gets permission from the Prudential Regulation Authority to pay a "modest" dividend for the first time since its bailout.

Lloyds shares are considered fully valued by many investors until it can pay a dividend. It trades at 1.3 times its book value, compared with HSBC (>> HSBC Holdings plc) at 1 times book value, RBS at 0.8 times and Barclays (>> Barclays PLC) at 0.7.

Lloyds is expected to be trading at 86.7 pence in twelve months time, according to 23 analysts polled by Thomson Reuters. On average they forecast a 2014 dividend of 1.23 pence.

Lloyds shares were one of the best performing stocks in the FTSE-100 index in 2012 and 2013 but have fallen by 12 percent since January - leading Britain's Finance Ministry to abandon a planned sale to retail investors in September.

Lloyds must convince the PRA it is sufficiently capitalised to withstand future market shocks and able to pass stress tests by European and UK regulators, with results due later this year.

If Lloyds got the green light from the PRA this month it could in theory announce its dividend plans alongside its third-quarter results and strategy review on Oct. 28.

If it missed this window, a further sale would have to wait until after the bank's 2014 results on Feb. 27, by when uncertainty over the impending election could be an obstacle.

Britain's Labour party, which narrowly trails the ruling Conservatives in recent polls, plans to force the UK's biggest banks to sell hundreds of branches if it gains power. As Britain's biggest high street lender, Lloyds is in its sights.

RBS PROSPECTS ENHANCED

Meanwhile, the prospects of the government selling shares in RBS have improved with the bank on track to make a pretax profit of 4.8 billion pounds this year, according to a Thomson Reuters poll of 19 analysts, compared with an 8.2 billion pound loss last year, after recovering debts it had previously written off.

Unlike in the case of Lloyds, shares in RBS are still well below the price the government paid for them in a 45.2 billion pound bailout in 2008, and none have been sold so far. But industry and political sources say a first sale of the government's shares could happen in the next two years. Previous expectations put the first sales off by 3 to 5 years.

A source involved in the sale process said progress this year had taken RBS closer to the point at which the government's shares could start being sold, but cautioned this was unlikely until it had more clarity on conduct and litigation issues.

RBS is one of six banks in talks with the Financial Conduct Authority to settle allegations its staff were involved in the rigging of the global $5 trillion-a-day currency market. It is also being investigated by regulators looking into its treatment of struggling small British firms and its selling of bonds backed by residential mortgages in the United States.

Chief Executive Ross McEwan said last month that he expects the bank to be able to put the fallout from past misconduct behind it over the next 18 months.

   

(Reporting by Matt Scuffham; Editing by Alexander Smith and Peter Graff)

By Matt Scuffham