Virgin Money and private equity group JC Flowers are front-runners to buy 316 branches from Royal Bank of Scotland (LSE: RBS.L - news) after Santander (Madrid: SAN.MC - news) pulled out of a deal to buy them, although the bank could push to keep them.
Shares in RBS, which is 82pc owned by the British taxpayer, fell in early trading on Monday, while Santander shares rose 2pc.
Sir Philip Hampton, RBS chairman, said the European authorities had relaxed their stance on state aid and suggested the European Commission could be persuaded to rethink its demand for a sell-off.
“What’s changed since the original decision is the climate around state aid,” he said in Tokyo at the IMF annual meeting at the weekend.
“If you look at the LTROs [the European Central Bank’s emergency funding support for banks], in one way they are state aid. The Commission has been much, much more flexible. It used to be a pretty severe regime but they are making different judgments.”
Santander had been expected to pay £1.65bn for the 316 RBS branches but, following years of delays in attempting to carve out the business, a sale price of closer to £650m is now thought more likely.
Sir Richard Branson's Virgin Money was said to be "very interested", having lost out to Santander two years ago in the original bidding contest. RBS is thought to have initiated contact over the proposed deal.
Buying the branches would more than quadruple the size of Virgin Money's high street presence and also give it a small and medium-sized business lending operation
Last year, Virgin Money bought Northern Rock Plc, the "good bank" part of the collapsed lender, greatly expanding the scope of its operations and giving it 75 branches.
JC Flowers is also thought to be considering a potential bid. Christopher Flowers, the firm's founder, recently moved from the US to London to look at investment opportunities in Europe, and is keen to expand the firm's relatively small regional UK lender, One Savings Bank.
The Sunday Telegraph reported that NBNK was also weighing up a move for the branches. NBNK lost out to the Co-operative Group in the battle for 632 branches put up for sale by Lloyds Banking Group (LSE: LLOY.L - news) , but its chief executive, Gary Hoffman, is understood to be keen to size up the RBS branches.
The sale of the branches was ordered by the European authorities as a condition of RBS’s £45bn taxpayer bail-out in October 2008, that saved the lender from collapse at the height of the financial crisis.
RBS was expected to complete the transfer of the branches to Santander next year, but the Spanish bank pulled out last Friday, blaming technical problems that have beset the complex and long-delayed process to take control of the branches.
Stephen Hester, chief executive of RBS, said it was "disappointing" that the sale to Santander had fallen through.
Santander had originally agreed to acquire the branch business from RBS more than two years ago.
The collapse followed a meeting of Santander UK's board on Thursday at which it was decided to withdraw from the deal due to alleged frustrations over the length of time the deal was taking.
Ana Botin, chief executive of Santander UK, is reported to have met Mr Hester on Thursday evening to personally inform him of the bank's decision.
The delays are likely to mean that RBS will be forced to go to the European Commission to ask for an extension to the deadline for the transfer of the branches.