Nov. 2 (Bloomberg) -- Royal Bank of Scotland Group Plc, Britain’s biggest government-controlled bank, will cut 3,700 jobs at its U.K. branches and said it may be forced by the European Union to sell more assets than planned.

RBS will eliminate the administrative posts in the consumer banking division over the next two years, RBS spokeswoman Jayne Goodwins-Miller said by telephone today. An agreement with the EU will “include some divestments not initially contemplated,” Edinburgh-based RBS said in a separate statement today.

RBS may have to sell its Churchill, Direct Line and Green Flag insurance operations along with more than 300 bank branches, and shrink its investment banking unit after receiving 20 billion pounds ($33 billion) from the government last year, a person familiar with the matter said last week. Asset sales may trim net income by as much as 1.5 billion pounds, analyst Jonathan Pierce at Credit Suisse Group AG wrote in a note to investors today.

“I wouldn’t assume that being a forced seller will get them a really good price,” said Jane Coffey, who helps manage $51 billion at Royal London Asset Management which holds RBS stock. “The uncertainty continues and the news continues to get marginally worse.”

RBS may sell its holding in its Sempra Commodities LLP joint venture, part of its investment banking unit. The lender paid about $1.2 billion for the stake in the commodities trading firm in April 2008. Sempra has the right to buy back RBS’s stake, the San Diego-based utility owner said in a statement today.

EU Pressure

RBS may also have to sell its Global Merchant Acquiring card-processing unit, the Sunday Telegraph reported, without saying where it got the information. The bank wants to hold on to its Citizens Financial Group U.S. unit, the newspaper said.

The EU is forcing banks that took state money to sell assets and branches to ensure they don’t have an unfair advantage. Last month, it forced ING Groep NV, the biggest Dutch financial services company, to sell its insurance units to win approval for a bailout. In the U.K., Lloyds Banking Group Plc may also have to sell asset and branches, while Northern Rock Plc is also splitting into two.

RBS, 70 percent government-owned, was down 7.8 percent at 38.65 pence in London trading, valuing the bank at 21.8 billion pounds. That was its lowest since July 17. Lloyds declined 2.3 percent to 85 pence.

Credit-default swaps on RBS rose 4.5 basis points to 117, according to CMA DataVision prices at 4:12 p.m. in London. That means it costs 117,000 euros a year to protect 10 million euros of the bank’s bonds from default for five years. Contracts on RBS’s junior bonds increased 7 basis points to 246, CMA prices show.

‘Sacrificial Lamb’

Breaking up RBS, Lloyds and Northern Rock will help create three new banks by 2013 and boost competition, Chancellor of the Exchequer Alistair Darling said yesterday in an interview with the British Broadcasting Corp. Lloyds last week said any forced asset sales “will not have a material impact,” on the bank.

“RBS rather than Lloyds is suddenly looking like the sacrificial lamb,” said Simon Willis, an analyst at NCB Stockbrokers Ltd. who has a “reduce” rating on the stock. EU- enforced disposals “are looking much more severe than expected,” he added.

RBS Chief Executive Officer Stephen Hester dropped plans to sell the bank’s insurance units in January after failing to agree a price with potential buyers.

European Commission spokesman Jonathan Todd declined to comment today, as did an official at RBS.

Risky Assets

“One of the interesting questions is how much this is the U.K. government wishes and how much is being imposed from Europe,” said Alistair Milne, a senior finance lecturer at London’s Cass Business School. “If we wanted to get as much taxpayer money back as quickly as possible you wouldn’t go down this break-up route, you would sell them as whole concerns.”

RBS also said it is close to agreement with the Treasury on a plan to insure risky assets. The bank may insure as much as 280 billion pounds under the Asset Protection Scheme, less than the initial agreement of insure 325 billion pounds, a person familiar with the situation said last week.

“RBS expects the agreement on the APS to reflect market improvements since February and RBS’s ongoing recovery whilst giving protection against future potential stressed-case losses,” the bank said in the statement.

Under the APS, the bank may have to pay a higher first-loss than the 43 billion-pounds that was part of the initial agreement, the person said. The bank may also be able to pay an annual premium for the insurance, rather than a lump sum spanning coverage for about five years, he added.

RBS posted a loss of about 24 billion pounds for 2008, the biggest in U.K. corporate history, following its acquisition of ABN Amro Holding NV.

The bank may make a further announcement no later than Nov. 6 and as early as tomorrow, a person familiar with the situation said.

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.net

Last Updated: November 2, 2009 13:53 EST