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16th October 2012

RBS branches and portfolio back on market

Santander will not be buying the 316 Royal Bank of Scotland, and National Westminster bank branches or the SME portfolio from Royal Bank of Scotland. The two banks agreed the deal in August 2010. A complication for RBS is that the reason for the disposal was as a remedy set by the European Commission for the state aid received by the bank and this has a deadline of 2013 year end.

The two banks suggest different reasons at the root cause of the deal collapse. The RBS stock exchange announcement referred to Santander as 'pulling out of the agreed purchase' and did not give more detail in this statement. Santander later issued a statement saying that it was not 'pulling out', instead it was refusing to agree to yet another extension to the deal timetable. When the deal was struck the proposed completion date was August 2011. This was then extended to a final agreement by Q4 2012 with a final deadline for completion of February 2013. Santander say it is apparent this final deadline will not be achieved and, "it has therefore notified RBS that it does not believe the conditions to the transfer of the Business from RBS to Santander UK will be satisfied by the agreed final deadline of February 2013 and that it is not willing to agree a further extension to that deadline."

Media, not naming sources, said over the weekend that IT problems were the source of Santander concerns. This would appear most unlikely. The reasons are more likely to be financial. When the deal was struck, in more optimistic times than the present, Santander agreed to pay a substantial premium on net assets, subject to certain criteria on completion. Even more critical is the effect the deal would have on the prime financial measure under Basel III, the Core Tier 1 (CT1) capital level. It is suggested that the deal could have reduced Santander CT1 by 2.5%. At June 2012 Santander CT1 was a healthy 12.1%, a 2.5% reduction would put it just above the minimum 9% required. Given Spain's property market problems are not over this would have to be a major concern.

Virgin Money and JC Flowers are both put forward as potential buyers of the portfolio by various media. JC Flowers has no UK banking system suitable to run such an operation. Although Virgin recently took over Northern Rock, their systems would be unlikely to be able to deal with the volume and complexity of the personal customer business and have no ability to handle the core SME portfolio. Although personal core banking systems can be bought, almost off the shelf, business banking is more complicated. The portfolio for sale is very large with total assets of £21.5bn, customer deposits of £22.4bn and risk-weighted assets of £15.2bn as at 31 December 2009. The other major retail banks were not allowed to bid on competitive grounds.