Santander walks away from £1.7bn branch deal with RBS

Nearly 2 million customers left in limbo two years after deal was agreed

Royal Bank of Scotland was sent back to the drawing board last night as a £1.65bn deal to offload 316 branches to rival lender Santander collapsed more than two years after it was struck.

The surprise move leaves in limbo 1.8 million customers and small businesses who were primed to transfer from one company to another, and will force the state-backed bank to conduct a hasty search for a new buyer.

RBS is being forced to sell the branches, mainly in England and Wales, plus £22bn in customer deposits, by the European Commission as the price for accepting state aid in its £45bn bailout. The deal was known to be running behind schedule and had encountered difficulties in integrating computer systems.

"While this is a profitable part of our business that we would rather not part with, RBS has worked hard to ensure it is substantially separate from our UK branch network and corporate business and largely ready to be taken on by a new owner," Stephen Hester, RBS's chief executive, said. He is expected to restart the sale process immediately.

The transaction was a one of a flurry in the wake of the banking crisis designed to create new competition in personal and corporate banking. Virgin Money acquired most of Northern Rock from the Government and the Co-operative Group bought branches from Lloyds Banking Group.

Antonio Horta-Osorio, the then head of Santander UK, agreed to buy the branches in August 2010 for £1.65bn, based on the value of the net assets plus a £350m premium. The deal promised to vault the Spanish-owned lender ahead of HSBC to give it the fourth-largest branch network and hike its market share of small and medium-sized businesses from 3 per cent to 8 per cent.

Emilio Botin, chairman of its Spanish parent, described the move then as a giant step, while Mr Hester added: "Santander will be a good owner of these assets. The divestment will make them a stronger competitor in UK banking, especially in the SME and mid-corporate sectors."

However, Santander UK, which is now headed by Ana Botin, warned in its interim report in August that the deal was proving complicated. "This is … a large and exceptionally complex migration. This complexity and concern to ensure that the transfer happens smoothly for customers means that some aspects of the integration programme are taking longer than originally anticipated," it said.

The bank has grown quickly since it entered the British market when it acquired Abbey National in 2004. Alliance & Leicester and Bradford & Bingley were bolted on at bargain-basement prices. However, the group has also been dogged by complaints over its poor customer service.

RBS, which is 83 per cent owned by the taxpayer, has made good progress with reshaping, even if its share price has remained flat on a year ago. Other transactions ordered by Brussels include the £2bn sale of its payment card processor Global Merchant Services and commodities trader RBS Sempra. In addition, a stake in motor insurer Direct Line was successfully floated this week.

Early bidders for the branches first time around included Sir Richard Branson's Virgin Money, another Spanish bank, BBVA, and National Australia Bank, the owner of the Clydesdale and Yorkshire banks.