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UPDATE 3-NatWest to cut UK government stake with $1.5 billion buyback

* NatWest buys 1.1 billion pounds of shares

* First off-market deal after two wider sales

* Reduces government shareholding to 59.8%

* NatWest shares up (Adds context, analyst comment)

LONDON, March 19 (Reuters) - NatWest will buy back 1.1 billion pounds ($1.5 billion) of its shares from the British government, edging the state-backed lender further towards private hands as the government pushes to fully sell off banks bailed out in the financial crisis.

The sale crystallises a further loss of around 1.8 billion pounds for the government on its 45-billion-pound rescue of NatWest. The Office for Budget Responsibility forecast in March the government would make an overall loss of about 39 billion pounds on the bailout once finance costs were factored in.

NatWest, formerly Royal Bank of Scotland, will be 59.8% government-owned after the deal, down from 62% previously. The price of the transaction was yesterday’s share price close of 190.5 pence, well below the 502 pence bailout level.

“We believe this is a good use of capital for the bank and our shareholders,” NatWest CEO Alison Rose said on Friday.

The government’s two previous sales of part of its holding in NatWest, in August 2015 and June 2018, were wider market placements involving private investors.

NatWest has long argued that the rescue deal was needed to stabilise Britain’s financial system during the 2007-09 crisis, and that it was unrealistic for the government to expect a profit to be made.

The bank is restricted to buying around 5% of its stock a year from the government. The deal uses up 4.86% of this allocation, all but ruling out further purchases until next March at the earliest without a change in rules at an investor meeting.

NatWest shares gained more than 2% in early trading and were last up nearly 1%, versus a fall of more than 2% in the FTSE 350 banks index.

‘STEP TOWARDS FREEDOM’

The government said this month it was targeting returning the bank to full private ownership in 2026, a year later than previously planned.

Britain’s finance ministry said the deal “represents an important step” in the government’s plan to return bailed out banks to private hands.

NatWest has remained majority state-owned even as other lenders rescued in the financial crisis have been privatised, with the last chunk of failed lenders Northern Rock and Bradford & Bingley sold off last month.

Rival Lloyds was fully privatised in 2017.

NatWest had been storing up capital to buy back government stock and speed up the sale process, with central bank restrictions on paying out dividends giving it more headroom.

NatWest’s core capital ratio will reduce from 18.5% to 17.7% following the deal and a 500-million-pound contribution to its main pension scheme.

Investec analyst Ian Gordon said the deal represented “another small step along the path to freedom” for the bank.

The deal comes days after it emerged NatWest faces criminal money laundering charges and the risk of an unlimited fine over allegations it failed to detect suspicious activity by a customer depositing millions of pounds of cash.

$1 = 0.7184 pounds Reporting by Tom Wilson and Iain Withers; Editing by Rachel Armstrong, Alexander Smith and Pravin Char

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