After 26 months, hundreds of millions of pounds of costs, and letters to 1.8m customers, one phone call was all it took to bring Royal Bank of Scotland’s hopes of selling 316 branches to rival Santander (Madrid: SAN.MC - news) to an end.
The call was placed by Ana Botin, Santander UK chief, to her opposite number Stephen Hester mid-way through Thursday evening. Standing in her office in the bank’s Triton Square headquarters on London’s Euston Road, she told Hester that she would like to meet him to discuss the sale. He agreed to go and have a face-to-face.
Sources have indicated that, driving west from RBS’s headquarters on Bishopsgate in the City of London (LSE: CIN.L - news) , Hester assumed Botin was seeking to play things out a little longer, thinking she would ask for a third delay to the deal.
But when Hester arrived after the 12-minute journey, Botin had quite a different message to deliver. The Santander UK CEO was invoking a clause which would allow the Spanish-owned bank to walk away from the deal. The meeting between the two came after a crunch meeting of the board of Santander UK, chaired by Lord Burns, the former Treasury mandarin.
The 12-man board had heard the findings of a report from consultants Accenture (NYSE: ACN - news) , commissioned by both banks, on the process of the sale which had begun in August 2010. The report looked into the reason for the series of delays that had plagued the process to date, and tried to establish a realistic timeframe for when it might be completed.
Unfortunately for RBS, what one party within Santander referred to as the “sensible timeline” was that the retail part of the acquisition would be ready to be moved over in 2014 and the business lending part a year later. At the heart of the Accenture report were question marks over translating the accounts, which contain £21.7bn of customer deposits, from RBS’s technology platform to that of Santander.
Specifically, sources indicated that RBS’s somewhat “medieval” platform — which triggered account outages for customers in July — was the root of the problem. There was also the fact that its system runs on individual sort codes for individual branches, whereas Santander’s platform operates on just two sort codes, one for current accounts and one for savings accounts.
However, other sources indicate that despite Santander’s claims to having the best retail banking technology platform in the UK, the sheer lack of complexity of its systems was the real deal breaker.
The 2015 end date — some four years after the original deal was supposed to be completed — plus the fact that one insider said there “was no certainty that some of the outstanding issues could be overcome”, led Botin and her team to pour cold water on Project Rainbow, the name given for the process within Santander.
It is also the case that as part of Grupo Santander, the Spanish banking conglomerate, the continuing problems in the Spanish banking industry may have played their part. Although Santander UK bank is ring-fenced, and had a Tier One capital ratio of 12.1pc at the end of the first six months of the year, it could be the case that external influences had an effect on the decision.
Another source pointed to the difference in banking climates between the time that the deal was first completed and today. In addition, it was not Botin, but her predecessor, Antonio Horta-Osorio, now chief executive of rival Lloyds Banking Group (LSE: LLOY.L - news) , that signed on the dotted line to do the original deal.
For RBS, the decision is less than helpful. Having used the August 2010 announcement of the sale as one of the first markers that he was getting the bank back on track after the financial crisis, Hester is thought to be frustrated by but resigned to the latest developments.
In an attempt to keep the peace with Santander, he initially agreed to Botin’s plea to work towards announcing details of the ending of the deal at 7am Tuesday morning (NasdaqGS: TUES - news) . But following advice from RBS’s lawyers throughout Friday, it became apparent that given the size of the deal and the number of customers and staff — some 5,000 — involved it was more appropriate to announce it on Friday night.
Sources close to Hester indicated that the while the decision is aggravating, due to the extra workload it will create, financially it is not material. In the first six months of this year, the 316 branch business delivered £186m of operating profit, and since the start of 2010 the set of branches has delivered cumulative operating profit equivalent to 4pc of the bank’s core operating profit.
Sources also indicate that holding on to the division will make RBS more money than selling it for the time being. However, it appears unlikely that the bank will be able to hold on to the unit for good, despite comments made by Sir Philip Hampton, RBS chairman, in Tokyo today, which suggested the bank will ask for a reversal of the December 2013 divestment deadline set by the European Union.
Instead, senior sources insist, what is more likely is a request for an extension to the deadline, allowing RBS time to relaunch the sales process which initially began in 2010.
That process could lead to one of two options — either a trade sale, or an initial public offering of the business. Hester himself is believed to be agnostic over which path to take. However, it is known that he has in the past referred to his desire to revive the old “Williams and Glyn’s” brand, which the banks owns, through the separation of a stand-alone unit.
Supporters for such a move point to the success last week of Direct Line’s initial public offering, although it is thought that more accounts would need to be placed into the existing unit for it to operate independently and meet capital requirements.
Alternatively, a straight sale would yield a significantly lower price than the £1.65bn Santander originally agreed to, which included a £350m premium to the £1.3bn book value.
One rival banker said RBS could expect to receive in the region of £600-650m for the assets, roughly half the book value. If that were to be the case, however, RBS sources point out that the profits being generated in the meantime will more than make up for the difference.
“It’s a pain in the neck but RBS will be neutral or perhaps even better off as a result,” said one bank source. Hester, and the bank he has guided for the past three years, may be down but they are not out.