Royal Bank of Scotland expects a substantial increase in its capital thanks to the sale of businesses over the coming years and intends to return some of it to shareholders, chief executive Ross McEwan said.

The bank, 78 per cent owned by the government, said in February it would shrink its investment banking operations drastically, pulling out of 25 countries across Europe, Asia and the Middle East, to help it refocus on lending in Britain. It is also selling its US bank Citizens.

"As we reduce risk, and make expected divestments over the coming years, we anticipate a substantial increase in our capital as a result. Subject to approval, we intend to return any surplus capital to our shareholders," McEwan told the bank's annual meeting on Tuesday.

Paying a dividend or buying back shares would make the bank more attractive to investors and help the government dispose of its stake.

British finance minister George Osborne has said the government will start selling its shares in the coming months. The bank was bailed out at a cost of GBP45.8 billion ($72 billion) to taxpayers during the 2007-09 financial crisis.

RBS is aiming for a core Tier 1 capital ratio of 13 per cent and plans to return any capital about that level.

The bank's core Tier 1 ratio, a key measure of its financial strength, stood at 11.5 per cent at the end of the first quarter and the sale of Citizens is expected to result in a improvement of about 300 basis points.

CULTURE CHANGE

Prior to the meeting, Chairman Philip Hampton said it would take the government several years to sell its entire shareholding in the bank.

"I've long thought the process should have started," Hampton, who is to leave the bank this year after six and a half years, told reporters before the meeting.

"It's a lot of stock to shift and I think it will take several years," he said.

McEwan told reporters that Osborne's plan to start selling the shares had boosted morale at the bank.

"I think it was a positive signal to our people that we're getting back on the recovery path, that the bank is getting in better shape and that the government thinks it's closer to a point of sale," he said.

Hampton oversaw a huge restructuring of RBS, which shed more than 1 trillion pounds of assets as it re-focused on lending to British households and businesses.

But RBS is still hampered by past misconduct and is expected to have to pay out billions of dollars later this year to settle claims it misled investors in mortgage-backed securities. It has already been fined for the attempted manipulation of foreign exchange and benchmark interest rates.

"The recent fines enforced on banks including RBS for foreign exchange and Libor manipulation are examples of behaviour that cannot be tolerated. There is no place for that behaviour in this bank," Hampton told the meeting.

Hampton said there was still "work to do across the industry to improve culture."

As well as misconduct, RBS was hit by an IT failure last week that led to 600,000 customer transactions failing and was the latest of several technical problems to affect the bank.

McEwan said RBS has launched an investigation into the matter at the request of the bank's board.

"Our first objective was to fix the issue which we have done, our team worked for days and nights. But now we will be doing a full review and that process has started," he said.

About 99.3 per cent of shareholders represented at the meeting voted in favour of the bank's pay plans. – Reuters