RBS Faces Setback in Branch Sale

The branch sale to Santander UK fell through, but investors shouldn't fret since another buyer is likely at the ready

Erin Davis 15 October, 2012 | 5:28PM
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Royal Bank of Scotland (RBS) announced on Monday that Santander UK has decided to withdraw from its agreed purchase of 316 RBS branches. A sale of the branches is mandated by the European Commission as a result of the state aid RBS received during the financial crisis.

We view this as a setback for RBS, but not a large enough one to move the needle on our fair value estimate, which currently sits at 360p.

We continue to expect the RBS branches to be sold, although probably at a lower price, perhaps to one of the buyers who lost out on the first round of bidding. In particular, we've heard rumours that Richard Branson and Christopher Flowers have expressed renewed interest.

The original deal inked with the European Commission calls for the branches to be sold by year-end 2013, but we think this deadline is likely to be extended, given that RBS made a good-faith effort to meet it.

We remain alert for more details on why the deal fell apart. We've heard that it was because RBS' and Santander's banking platforms were incompatible, and that Santander decided it would not be able to transfer the acquired clients to its platform. We take some solace in this Santander-specific explanation; we would be more worried if the deal collapsed over branch quality issues, which could indicate a larger asset quality issue at the bank.

RBS also recently spun off the insurance company, Direct Line. To learn more about the Direct Line IPO on the London Stock exchange, read "Direct Line: An Indirect Market Debut".

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Erin Davis  is a senior banking analyst for Morningstar.