* Says watching RBS branch sale process "very carefully"
* Says "enormous complexities" around possible deal
* Says potential problems relate to extracting assets
* H1 underlying profit 151 mln stg vs 181 mln last year
* Sets aside further 45 mln stg to cover PPI mis-selling
By Matt Scuffham
LONDON, Nov 27 (Reuters) - Nationwide, Britain's biggest customer-owned financial services group, is interested in bidding for 316 branches being sold by Royal Bank of Scotland to speed up its expansion into lending to small and medium-sized businesses.
A 1.65-billion-pound ($2.6 billion) deal to sell the branches collapsed last month after Spanish bidder Santander said the process of carving out the business from RBS had proved more difficult than expected.
RBS, ordered to sell the branches as a condition of winning European approval for a state bailout during the 2008 financial crisis, has sent new sales documents to prospective buyers, and is hoping to draw up a shortlist next month.
"Strategically we want to enter into the SME (small and medium-sized enterprise) space. If there's anything I could do that would accelerate our strategy it would be of interest," Nationwide Chief Executive Graham Beale told Reuters on Tuesday.
"Within that context, RBS is something which we will watch very carefully."
Beale said Nationwide was running the rule over the branches but would only proceed if it was convinced the complexities involved in executing a deal could be overcome.
"There are clearly some enormous complexities there, otherwise that deal would have been done. We need to understand just what those issues are before we can be committal on the point," he said.
Beale said he anticipated difficulties in separating the business from RBS as it was not a standalone entity but an amalgamation of assets embedded in a whole host of systems.
FUNDING NO PROBLEM
Beale said Nationwide would have no problem funding the transaction if it chose to proceed with a bid.
"If we were to do the RBS transaction, of all the things I'd be concerned about, funding wouldn't be one of them. If you look at the strength of our balance sheet, we've got one of the strongest solvency ratios in the industry," he said.
Santander agreed to buy the RBS branches in August 2010 but technology and separation issues pushed back the original December 2011 completion date and the bank eventually concluded a deal could not be reached in a reasonable timeframe.
Sources close to the matter have said businessman Richard Branson's Virgin Money and U.S. private equity firm J.C. Flowers are also interested in the branches.
Corsair Capital, led by former Standard Chartered chairman Mervyn Davies, and a joint venture between Blackstone and Anacap, the backers of new bank Aldermore, have made expressions of interest as well, sources have said.
Any deal, however, is expected to fall short of the price agreed with Santander.
RBS wants to have a shortlist of possible buyers in place by the middle of December and will then look to cut that down to two serious bidders, sources have said. It is planning a stock exchange listing of the business if a sale can't be agreed.
UBS is advising RBS on the sale process.
Nationwide also said it had set aside a further 45 million pounds to compensate customers mis-sold loan insurance, joining rivals in stepping up provisions and taking its total compensation bill to 173 million pounds.
The cost of the compensation for the rising level of payment protection insurance (PPI) claims, along with higher impairment charges in Nationwide's commercial lending division, led to a decline in first-half underlying profit to 151 million pounds, against 181 million pounds the previous year.
Britain's financial services industry could face a total bill of more than 15 billion pounds to cover compensation payouts for one of the country's biggest mis-selling scandals.
PPI policies were typically taken out alongside a personal loan or mortgage to cover repayments if customers fell ill or lost their job, but they were often sold to people who would not have been eligible to claim on the policies.