Royal Bank of Scotland is this weekend mulling the option of selling its Direct Line insurance business in an effort to sweeten investors furious about a mammoth planned capital-raising of as much as £13 billion.

The auctioning of Direct Line and Churchill, its sister company, could raise £5 billion for RBS, reducing the amount of fresh equity the bank would need to shore up its ravaged balance sheet.

Sources close to Britain’s second-biggest bank confirmed that a big rights issue would go ahead anyway and the announcement was provisionally pencilled in for next Tuesday or Wednesday. RBS sees general insurance as less central to its business as it concentrates more on mainstream banking in the wake of the ABN Amro acquisition. It also believes that at this stage in the underwriting cycle, it should achieve a good price for Direct Line.

Direct Line and Churchill – familiar to millions because of the red telephone and the nodding bulldog in their TV advertisements – made £683 million in operating profit last year. Aviva, owner of Norwich Union, Zurich Financial Services, and AIG, the US insurer, might be interested in the brands, although Aviva might be blocked on monopolies grounds.

RBS shareholders urged it to use asset sales before pressing the button on any emergency capital-raising. Other disposal candidates could include its stakes in Bank of China, Angel Trains, the rolling stock company, and even Citizens, the American regional bank.

Investors also said that they would be pushing for boardroom changes as the price of supporting the deeply discounted rights issue, which is being underwritten by Merrill Lynch and Goldman Sachs.

Some would like to see RBS’s chief executive, Sir Fred Goodwin, resign, although others believe he is still the best man to integrate the newly acquired assets of ABN Amro.

One leading institutional investor told The Times that RBS should seriously consider asset sales: “That would be preferable. That and a bit of good housekeeping. They should cut their coat according to their cloth.” The shares oscillated, ending the day 5 per cent higher at 384p, as investors decided a capital-raising, combined with a “kitchen sink” approach to further losses, would dispel the negative sentiment hanging over the company.

RBS and its bankers were inundated yesterday with calls from irate shareholders, who until recently had been assured by the bank that its balance sheet was rock solid, one source admitted. But he was confident that they could be placated. “Once shareholders see the whole story and the big picture they will understand they have not been misled and the ire from some quarters will dissipate.”

Assuming a discount of 30 per cent, RBS would have to offer one new share for every two held to raise £13 billion. A larger discount would require more new shares to be offered for sale.

The proposed share issue, still not officially confirmed, could smash UK records, dwarfing the £5.9 billion raised by British Telecom in 2001.

The RBS move could flush out similar capital-raisings by other banks, whose balance sheets have been weakened by the credit crunch, analysts said. Barclays was seen as the next most under pressure with the second-weakest Tier 1 ratio – the most closely watched measure of financial strength. Sources close to the bank played down speculation that it was planning an imminent announcement. HBOS is also seen as a possible contender to raise fresh capital.

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