Lloyds and RBS look sellable but a rushed disposal is risky

The government is sitting on a paper profit on its investment in Lloyds and RBS. Timing a successful exit from the banks will be tricky for the chancellor.

Lloyds reported more good news today while state-owned Northern Rock reported a profit in one part of its business yesterday - ironically the 'bad' part. The banks are holding more than enough cash to meet regulatory rules, have sailed through their stress tests and have even managed to raise some money in the markets in recent months - all pointing to the fact they are on the road to recovery.

Inevitably that has sparked renewed talk that the agency charged with looking after the taxpayer's interests, the UKFI, may be readying to sell some or all of the government's holdings, possibly before the year is out.

Some believe the market appetite - for Lloyd's shares in particular - is so great that the government could easily sell its shares with only a small discount and increasingly there are suggestions we will hear more about the government's plans in the autumn.

Earlier this year, RBS chairman Philip Hampton said there would be a sale this year and Northern Rock's chief executive Gary Hoffman  hinted the same to reporters on Tuesday.

Others argue the government is unlikely to try and shift its stake until the findings of the consultation on whether big banks need to be split into two have been published next year.

Since Lloyds and Northern Rock are retail banks, that may be less of an issue when it comes to the government holdings in them.

Talk of a sale has been fuelled in part by the UKFI's appointment last month of former Merrill Lynch banker Jim O’Neil to 'protect the value of the taxpayer’s investments' and 'develop and execute the strategy for divesting the stakes in these banks.'

The leading investment banks would clearly love to get in on the action and will be knocking on the door offering their highly priced advice on how best to sell these stakes.

In the meantime, I'm sure the chancellor is taking advice from many quarters. After all the decision to sell or not to sell is not without risks.

If the government holds onto its stakes and the recovery picks up pace and profits climb, bank shares could follow suit.

George Osborne might be worried that if he approves a sale too soon he could end up being tarred with the same brush as Gordon Brown who notoriously sold Britain's gold at what turned out to be knock-down prices.