Santander set to shelve flotation of UK business

The main hurdle is uncertainty about how the Government and ICB will define the ring fence to split retail and investment banking
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Santander's planned part-flotation of its UK business is set to be delayed until next year because of uncertainty created by the Independent Commission on Banking's (ICB) reform proposals and volatile markets.

The Spanish bank was planning to sell 20 per cent of the business to investors in the fourth quarter of this year in a transaction that could value it at £20bn but the initial public offering (IPO) is now likely to be shelved until the first half of 2012.

The main hurdle is uncertainty about how the ICB and the Government will define the proposed ring fence to separate retail banking from investment banking.

About 85 per cent of Santander's business in the UK is retail and commercial banking but it supports business clients with hedging and other activities that could be classed as investment banking.

Until the ICB makes its recommendation and the Government decides whether to accept it, Santander will not know whether the non-retail services will be part of the flotation or separated into a separate division.

A source familiar with the situation said: "One of the issues with the ICB is that until what is inside the ring fence is defined it will be difficult to know what the make-up of Santander UK will be."

The flotation has already been delayed once. It was originally planned for the first half of this year but was put on hold after Santander's UK chief executive, Antonio Horta-Osorio, decided to quit for Lloyds Banking Group. Mr Horta-Osorio took key members of his management team with him and the IPO was delayed to allow its new boss, Ana Botin, and her team to settle in.

Since then, the ICB's April interim report has proposed ring-fencing but has left the definition open to debate.

The banks' responses to the interim report were published last week and showed them divided over what the best option was.

The ICB is scheduled to publish its final report on 12 September but there is likely to be a further delay while the Government decides how to respond.

Ms Botin told the BBA's annual conference last month that the scale of regulatory change was her biggest surprise since moving to the UK.

In its response to the interim report, Santander said the ring fence should not stop banks providing risk management services to corporate customers. It called for a de minimis test that would exclude banks from the ring fence if their investment banking activities were small enough not to threaten retail banking.

A Santander spokesman said yesterday that the bank's current intention was to float part of the business before the end of this year, subject to markets.

As well as uncertainty created by regulation, the wider market for IPOs has virtually stalled because of volatile equity markets spooked by sovereign debt fears and investor disillusionment after a number of floated companies fell below their offer prices.

About $10bn (£6.2bn) of European IPOs were shelved in the first half of 2011 and two thirds of securities lawyers polled by Merrill Corp said the UK market would weaken in the second half.

Santander entered the UK market in 2004 when it bought Abbey National, and has since acquired Alliance & Leicester and Bradford & Bingley's savings business.