THE chairman of UK Financial Investments (UKFI), which manages the Government's stakes in the part-nationalised banks, has admitted a "misjudgment" over the decision to award Royal Bank of Scotland chief executive Stephen Hester a £1 million bonus for last year.

Mr Hester declined the payout after an outcry and has said he won't take a bonus for 2012 after problems with the part-nationalised bank's computer systems over the summer.

Robin Budenberg told MPs: "What happened is that there was a significant public reaction. I think we were clearly involved in a misjudgment about what that reaction would be."

Asked if Chancellor George Osborne, who was consulted prior to the bonus announcement in January, was party to the misjudgment, Mr Budenberg said: "I think it was not the ideal outcome."

Jim O'Neil, UKFI chief executive, confirmed the organisation had highlighted to RBS the advantages of selling its Citizens bank in the United States as well as shrinking its investment banking arm.

RBS has had the same suggestion from the Financial Services Authority but Mr O'Neil insisted it was unconnected.

"We come at it from a shareholder perspective. The FSA comes at it from a regulatory perspective," he told the Treasury committee. "I think generally investment banks will be smaller over time and the question is what is the shape, size and direction of travel."

He said that 2013 would likely be the last year of significant restructuring at RBS and Lloyds. But he admitted rebuilding profits was "taking longer than expected".

Mr O'Neil declined to comment directly on reports there have been talks with Abu Dhabi's sovereign wealth fund over the purchase of a stake in RBS. He said UKFI had met a number of potential investors but no "formal proposals" had been discussed.

He reiterated UKFI's view that the initial stake disposal is likely to be a "market transaction" such as a sale to institutional investors or a wider share offering. RBS chairman Sir Philip Hampton indicated last week that he expects the first share sale to come before the next election.

Ian Gordon, analyst at Investec, warned in a note yesterday that RBS still has to sort out legacy issues. He said: "Sir Philip Hampton hopes to see a sell-down of UKFI's stake commence before the election. It is a worthy aspiration, but one unlikely to be realised."

The taxpayer bought into Lloyds at 73.6p a share and at 502p into RBS, once a recent share split is taken into account. Shares in both banks are currently trading at 45% below this level.

Mr O'Neill suggested the Government might take into account payments such as the £2.5 billion handed over by RBS to use the Government's Asset Protection Scheme to determine if it is profiting on its stake.

He said any share sale would require stability in the economy, regulation and financial markets.

Any hope campaigners have of extricating Halifax Bank of Scotland, which previously had its headquarters in Edinburgh, out of Lloyds were played down by Mr Budenberg.

He said: "It took Lloyds three years to integrate HBOS.

"I imagine unpicking that is more difficult that putting it together."