TOKYO/LONDON Royal Bank of Scotland (RBS.L) has attracted interest from Virgin Money and elsewhere for the 316 branches it is having to sell after a deal with Spain's Santander collapsed, and the bank could ask European regulators if it can keep the business.
Virgin Money, the UK financial services firm that last year bought Northern Rock, would be "very interested" in taking a look at the portfolio of branches - which come with 1.8 million customers - a person familiar with the matter said.
The source said Virgin Money is keen to grow further and would take a close look, but whether it would pursue a deal would depend on issues like integration prospects and price.
Virgin was interested in the branches, but missed out when RBS agreed to sell them to Santander (SAN.MC) for 1.65 billion pounds ($2.65 billion) more than two years ago.
Santander blamed delays in completion for its surprise retreat late on Friday.
The BBC said RBS had received approaches from two institutions interested in picking up whether Santander left off. RBS declined to comment.
RBS Chairman Philip Hampton signaled the bank could ask the European Union if it can keep the branches, saying regulators have become more relaxed about state aid rules than when they were set in 2009.
"What's changed since the original decision is the climate around state aid," Hampton said in Tokyo. "The Commission has been much, much more flexible. It used to be a pretty severe regime but they are making different judgments."
He added: "Governments have to negotiate state aid. As it happens, the UK retail banking market is more competitive now than it has been for decades."
RBS was surprised by Santander's decision and said it is considering its options.
"We had only one serious bidder (when it was sold). Others took a look and decided it wasn't for them. We now have to look at what Plan B might be," Hampton said.
RBS could have to accept a lower price, given depressed valuations for British banks, or consider a flotation.
The business earmarked for sale has been ring-fenced and is run under separate management, led by David Gillespie. Dubbed "Rainbow", it made an operating profit of 186 million pounds in the first six months of this year and RBS has said in the past it could use the old Williams & Glyn's bank brand name.
RBS Chief Executive Stephen Hester said in a statement after Friday's collapse that the branches were "a profitable part of our business that we would rather not part with".
Britain's largest trade union, Unite, urged the government to press the European Commission to lift its requirement for RBS to sell the branches and other assets, warning of a fire sale and mounting uncertainty among the 5,500 staff affected.
The British government said on Friday it remained determined to increase competition in the British retail banking sector.
Hampton said in addition to the competitive landscape, RBS could be more valuable to the government if it did not have to sell branches at a knock-down price.
Hampton also cast doubt on Saturday on the official reason given by Santander for withdrawing, that it was proving too difficult to carve out the RBS branches from their parent company, and that it was not prepared to wait longer.
Hampton, speaking to reporters in Tokyo where he was attending events on the sidelines of an International Monetary Fund meeting, raised the possibility that other factors might have been at play.
"People have speculated that it's not an easy time in general for banks to take on a lot of risk-weighted assets," Hampton said. "IT challenges always get overcome."
RBS, 83 percent owned by the British taxpayer, said it would restart the sale process, which had been ordered by European authorities as a cost for Britain's rescue of RBS in 2008.
Santander UK agreed to buy the branches in August 2010, but technology and separation issues had pushed back the original December 2011 completion date.
A report by consultancy Accenture estimated that the transfer of retail customers would not be completed until 2014, and the transfer of corporate customers would not be completed until 2015, Santander said.
However, facing a tougher regulatory and economic environment, Santander has also been shedding some assets, and on Thursday it sold 2.5 billion euros ($3.24 billion) of loans to Bank of America Merrill Lynch.
But unlike some other Spanish banks, Santander does not have a capital shortfall. The bank's core Tier 1 capital, a measure of financial strength, was 10.1 percent at the end of the second quarter by Basel criteria and 9.5 percent according to the European Banking Authority.
($1 = 0.6216 British pounds)
($1 = 0.7712 euros)
(Editing by Edmund Klamann and Jon Hemming)