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Santander grab for RBS branches could be capital cheap UK expansion

Finallyrealizing its ambition to acquire Royal Bank of Scotland Group Plc's English and Welshbranch network would take Santander UK Plc closer to its aim of becoming one ofthe country's top three banks, with relatively little impact on a parentcompany capital ratio already toward the bottom of its peer group.

TheU.K. unit of Spain's biggest lender has been in talks to acquire over 300 RBSbranches set to be rebranded as Williams & Glyn, Sky News reported July 17,adding that it was unclear whether a deal would be feasible but, if so, itwould be structured as an asset transfer.

Anagreement reducing the need for the parent company to stump up cash wouldreduce any impact on Banco Santander's capital. Its fully loaded common equityTier 1 ratio of 10.3% at the end of the first quarter was the lowest of anyEuropean globally systemically important bank. It is also awaiting results of aEuropean Banking Authority stress test July 29.

Williams& Glyn would bring Santander roughly £24 billion of deposits, as well as300 branches and in excess of 2 million customers, Sky reported. Santander hasabout 14 million active customers in the U.K. and operates through 853 branches.

Santanderentered the U.K. market in 2004, acquiring Abbey National. It has since addedAlliance & Leicester Plc and the savings business and branches of Bradford& Bingley. But, while the bank made more profit in the U.K. than in any othercountry in the first quarter — 48% more than in Spain — it is still behind onits stated ambition to be one of the top three lenders in the country, with itsbranch network lagging LloydsBanking Group Plc, Royal Bank of Scotland, and HSBC in size.

"Santanderhas been expanding in the U.K. with bolt-on acquisitions. They have a very goodtrack record at integrating and it wouldn't be difficult for them to do. Itwould give them more scale. Their strategic approach is to be among the topbanks wherever they are," Marco Troiano, financial institutions directorat Scope Ratings, said in an interview.

Second attempt

Thiswould be Santander U.K.'s second attempt at absorbing Williams & Glyn,which it agreed to buy for £1.65 billion in 2010, before the deal in late 2012 as aresult of IT integration issues. There was speculation in January that thetransaction was back on the table after it emerged that Santander U.K. had hired UBS as an adviserfor a repeat attempt.

OffloadingWilliams & Glyn to Santander would mean a lower price for RBS, but thegovernment-controlled U.K. bank would save by being able to drop the difficultand expensive task of carving out a separate IT infrastructure for the unitbeing hived off, a project which is thought to have already cost as much as£1.2 billion.

RBShas been preparing Williams & Glyn for sale as a stand-alone company sinceits taxpayer-funded bailout in 2008, and, under the terms of an agreementbetween the U.K. government and the European Commission, it must divest thebranches by the end of 2017.

"Thiswould be quite a U-turn for RBS. They have spent years working on the currentpath," one analyst said, asking not to be named. "An asset transfermight well be the easiest option, but it would certainly be a big change indirection."

Froman IT standpoint, the asset transfer deal could follow a precedent set byTSB Banking GroupPlc, which continued to use Lloyds' platform after it wasbought by in 2015,the analyst said.  

RBShas warned on several occasions that a sale would be complicated and expensive,and said in Aprilthis year that offloading the unit would have a bigger financial impact than originallyanticipated.

Atakeover of Williams & Glyn by Santander is unlikely to trigger regulatoryconcerns, Troiano said, although he noted that regulators may still prefer tosee a new market entrant like Williams & Glyn would be.

Santandersaid in an emailed statement that its focus was on "organic growth,"but that it continued to consider opportunities in its 10 core markets. Aspokesperson said the bank did not comment on market speculation or rumors. RBSdeclined to comment.

RBS’shares were trading at 190 pence by 2:15 p.m. London time, up from 181 penceJuly 15. Santander's eased to €3.74 from €3.80 before the Sky story.