Royal Bank of Scotland Group Plc, Britain’s biggest government-owned bank, said Spain’s Banco Santander SA pulled out of an agreement to buy 316 branches, a deal that was valued at about 1.7 billion pounds ($2.7 billion).
RBS will seek a new way to dispose of the outlets, a step that was required following the lender’s taxpayer-funded bailout, Chief Executive Officer Stephen Hester said yesterday in a statement. Santander, based in Madrid, said in a separate statement that it withdrew from the transaction after delays in its completion.
“That’s more likely to be an excuse,” Cormac Leech, a senior banks analyst at Liberum Capital in London, said today in a phone interview. “It looks like Santander may have problems elsewhere and they’re under more pressure to walk away.”
Santander’s decision to abandon the purchase coincides with increasing regulatory pressure on Spanish banks to bolster capital amid mounting real estate losses at home and pain from the three-year-old euro-area sovereign debt crisis. For RBS, the failure of the transaction might prompt it look to sell the branches in an initial public as it did with its Direct Line Insurance Group Plc unit, Leech said. RBS raised 787 million pounds in an IPO of 30 percent of the unit on Oct. 11.
Branches for sale include locations in England and Wales, as well as a business in Scotland. The unit had a 186 million-pound operating profit in this year’s first half and holds 21.7 billion pounds in customer deposits, RBS said.
“Much of the heavy lifting associated with a transfer has already been completed,” Hester said in the statement. “RBS has worked hard to ensure it is substantially separate from our U.K. branch network and corporate business and largely ready to be taken on by a new owner.”
The sale also includes RBS’s National Westminster Bank branch network in Scotland, which the lender purchased in 2000. The bank sought to dispose of the branches to comply with a European Union ruling after it received government bailout funds during the global credit crisis.
Santander had agreed in 2010 to pay 350 million pounds more than the branches’ net asset value when the deal was scheduled to be completed, Edinburgh-based RBS said at the time. That valued the business at about 1.7 billion pounds.
Since then, Santander, Spain’s biggest bank, has sought ways to boost capital. The bank carried out an offering of as much as $4.09 billion in shares of its Mexican unit Grupo Financiero Santander Mexico SAB last month. Chairman Emilio Botin has said that the firm plans to list its biggest units within the next five years.
“One of the reasons why Santander may have abandoned this deal is because overall profit expectations for banks in the U.K. aren’t as great as the market had forecast because of regulatory pressure,” Inigo Lecubarri, who helps manage about $400 million at Abaco Financials Fund in London, said today.
“Additionally, banks are being requested to boost their capital all around the world, and Santander may find some savings by pulling out of this deal at a very little cost.”
The companies originally sought to finish the transaction by the end of 2011, according to Santander’s statement. That was later extended to 2012’s fourth quarter, it said.
“Our guiding principle throughout this transaction has been a seamless journey for customers -- which requires the business to be delivered to Santander U.K. by RBS in a steady state,” Santander U.K. CEO Ana Botin said in the statement. “We have concluded that given delays, it is not possible to complete this within a reasonable timeframe.”
The U.K. Treasury said in a statement that the deal is a commercial matter for RBS and Santander.
“The government remains determined to promote greater competition in the banking sector, in order to provide consumers with better services, and a more diverse range of financial products,” the Treasury said in an e-mailed statement. “We have already made substantial achievements such as the sale of Northern Rock, and good progress is being made on the disposal of Lloyds branches to the Co-operative Group.”
If RBS sells the branches in an IPO, Leech said the price would probably be about 900 million to 1 billion pounds in the current environment. He said that investors making that assumption would trim about 2 percent off the bank’s current market value when the London Stock Exchange opens on Monday.
“I expect the market to overreact and RBS to decline 3 percent to 4 percent on Monday on this news,” Leech said.