THE Royal Bank of Scotland will struggle to raise the intended £7bn from the sale of its insurance arm because the phenomenal growth of price comparison sites has undermined its business model, analysts have warned.

RBS shares sank to fresh lows of 224p amid concerns about levels of investor participation in its £12 billion rights issue in an increasingly uncertain economy, as well as worries over whether or not it will raise as much as it hopes from the disposal of its insurance businesses.

However, there is light at the end of the tunnel for RBS's beleaguered chief executive Sir Fred Goodwin. The bank is expected to finalise the up to £3.5bn sale of train leasing company Angel Trains, to the Australian infrastructure investors Babcock & Brown by the end of June.

The Edinburgh-based bank first declared it would sell its insurance group, whose brands include Direct Line, Churchill and Privilege, on April 22. The disposal, deeply unpopular with some RBS shareholders, forms part of the bank's efforts to shore up its balance sheet, stretched by the credit crunch and last year's takeover of ABN Amro.

However, Duncan Russell, an analyst at JP Morgan, warned that the rapid growth of price comparison websites such as moneysupermarket.com in the UK market has undermined Direct Line's business model and will therefore dent bidder appetite for the transaction. RBS's biggest insurance brand, Direct Line has deliberately avoided doing business with such sites, partly because they run counter to its model of direct customer contact and threaten margins.

Yet price comparison websites, such as confused.com, gocompare.com and the SMG-owned peopleschampion.com, are a growing force in the UK general insurance market and already account for 35% of all new motor insurance policies in the UK, against 5% three years ago, according to JP Morgan research.

Russell said RBS Insurance's dominant 32% share of the UK motor insurance market will be eroded as the market increasingly becomes "multi-branded along similar lines to the shampoo market in the supermarket world."

"Any buyer of Direct Line will be allocating more capital to a market that is experiencing structural price deflation, and to the player with the largest renewal book," said Russell.

"The most vulnerable insurance players will be those with large renewal books, whose customers may look to get a better deal from comparison sites."

This probably explains why the original field of bidders for the RBS insurance businesses - whose brands also include Churchill and Privilege - was last week whittled down to just four. Several global insurance players pulled out of the race, including Italian insurer Assicurazioni Generali, which said the £7bn price tag was too high, and China's Ping An.

Only five bidders remain in the auction, with Zurich Financial Services seen as the front-runner. The others are Germany's Allianz and three US insurers - AIG, Allstate and Travelers.

Sources close to the deal were downplaying suggestions that the timetable had slipped, saying Wednesday's deadline for preliminary bids was only "indicative" and that RBS will probably update investors alongside its interim results in August. The sale is being handled by investment banks Goldman Sachs and Merrill Lynch. No-one from Goldman Sachs or RBS would comment.

Andreas Schaefer, an insurance analyst at WestLB, said: "After the withdrawal of Generali, we see Zurich as the most likely bidder. The strategic rationale is compelling, as ZFS owns a significant pan-European direct insurance network with strong market positions in all markets where RBS is also present, including the UK. Possible synergies are therefore likely to be much higher. In terms of financial flexibility, ZFS also has excess capital available." However, he added, RBS's target price of £7bn was "completely unrealistic" and that £5bn represented fair value for the assets.

A spokeswoman for RBS said: "The one thing you can be sure of in this type of transaction is that the number of bidders will reduce as it progresses. There is no deadline for completion. We intend to achieve value for our shareholders from any whole or part disposal and that will take as long as it takes."

Last Wednesday, RBS shares climbed marginally amid volatile trading after analysts at Credit Suisse upgraded the bank to "neutral" from "underperform", saying that, like Lloyds TSB and Barclays, it is faring better than more mortgage-oriented rivals such as HBOS.

Credit Suisse analyst Jonathan Pierce believes there is limited chance of further writedowns or capital-raising at RBS, saying: "We think one can throw an awful lot at RBS and still be reasonably comfortable that its book position is tenable." His forecasts assume that the insurance division will remain unsold.

Credit Suisse also predicted that RBS's pre-tax profit would fall from £10.06bn in 2007 to just £2.6bn in 2008 before climbing back to £9bn in 2009 and £10.8bn in 2010.

However, this did not prevent RBS shares from touching new lows later in the week, with the stock falling by as much as 6% on Thursday, when it touched an eight-year low of 224p, partly due to concerns over the rights issue. The shares have fallen by some 62% over the past 12 months.

Analysts point out that shares in companies that are about to mount rights issues often plunge in value when they go "ex-rights", and said RBS shares have suffered because of the sheer scale of its fund-raising, the biggest in financial history, and by continued negative sentiment towards the banking sector.

RBS's geographic diversity has made it marginally more popular with investors than other UK-focused banks that have announced rights issues - Bradford & Bingley and HBOS.

Last week, traders expressed concern about the size of the "rump" of unwanted bank shares that the investment banks which are underwriting these rights issues will have to sell on behalf of those investors who do not take up their rights. RBS shareholders have until Friday, June 6, to sign up for the rights, and the rump will be placed soon after that.

"Talk about rights issue indigestion" said one City trader. "If this rights issue is a disappointment, the RBS share price of would almost certainly tank. Existing shareholders would be taking a huge risk not supporting it."