Royal Bank of Scotland's shares soared by as much as 22% yesterday after it was revealed the bank is preparing to create a new division to hold unwanted assets, but analysts warned that chief executive Stephen Hester will struggle to recreate the success he had with a similar approach at Abbey National.

Banking stocks and wider markets were also lifted by reports that the US government was poised to take a stake of as much as 40% in Citigroup.

Hester is expected on Thursday to announce what will effectively be a three-way carve-up of the 68% state-owned bank. A core bank focused on the UK and US will remain. A separate division will be created for assets of up to £300bn that it wants to get rid of, which is expected to include much of the Asian, Eastern European and investment banking businesses that came from its takeover of ABN Amro in 2007.

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It is also in negotiations with the government over the terms of its participation in a government insurance scheme that will protect it against future losses on a portfolio containing some of the most toxic assets from its investment banking operations. Discussions are continuing over the level of the first loss that will have to be absorbed by RBS and the timescale over which it would have to pay any fee, as well as the level of the charge.

RBS shares eventually closed up 1.9p, or 9.8%, at 21.2p.

Alex Potter, analyst at Collins Stewart said shareholders would benefit from "transparency" on the creation of a division holding RBS's unwanted assets, making it easier for investors to value the bank, but cautioned that conditions were more difficult than in 2002 when Hester worked on the restructuring of Abbey National.

"He (Hester) had some success with it when he was at Abbey. A large part of the success in the Abbey restructuring was selling assets into an improving credit market and a credit market that ended up being one of the best in history. That was a significantly easier time than today."

The arrangement is part of Hester's effort to create a smaller bank focused largely on the UK and US.

This is a similar structure to the "Portfolio Business Unit" Hester and former UBS banker Luqman Arnold created at Abbey National when they restructured it in 2002. Abbey was later bought by Spain's Banco Santander.

The way Royal Bank of Scotland will pay for insurance to cover up to £250bn of its toxic assets is being finalised. RBS is thought likely to issue new shares to the government, which will not carry voting rights but may be able to pay a dividend.

Meanwhile, Northern Rock, the nationalised Newcastle-based lender, yesterday revealed it expects to make a full year pre-tax loss for 2008 of £1.4bn, up from £600m for the first half of the year. This includes £900m of charges to cover bad loans.

The proportion of its mortgage customers more than three months in arrears soared from 1.87% to 2.92% between the end of September and the end of December, the bank said.

Chief executive Gary Hoffman said: "2008 was an extremely difficult year for the company, as expected. We confirmed in our business plan last March that the company would be substantially loss making in 2008 and this proved to be the case, driven by the deteriorating economic situation and the increased level of loan loss impairment."

Northern Rock confirmed yesterday it is to lend up to £14bn over the next two years, adding detail to its pledge in January to increase its lending after sharply scaling back its balance sheet to repay some £25bn of government funding. It has so far repaid £18bn.

Across the Atlantic, Citigroup is in talks with officials that could lead to the US government taking as much as a 40% stake in the struggling lender. However, Citigroup executives are thought to be keen to keep the stake as low as 25%.

Citigroup chief executive Vikram Pandit sought to reassure employees by sending them a letter telling them he remains "very confident" in Citi's prospects. But analysts warned the government could struggle to resell its stake back into the market.

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