By Matt Scuffham
LONDON, Oct 15 (Reuters) - Shares of Royal Bank of Scotland are set to open lower on Monday following the shock decision by Spain's Santander to pull out of a deal to buy 316 branches from the part-nationalised British bank.
The collapse of the deal, late on Friday, was a major blow to RBS, coming at a critical juncture in its recovery plan and could push back the time frame for taxpayers to see a return on the 45 billion pounds Britain pumped into the bank to keep it afloat.
Although Richard Branson's Virgin Money has emerged as a possible alternative bidder, RBS faces a tough task to clinch a sale by a 2013 deadline and will likely have to lower the 1.65 billion pound ($2.65 billion) asking price.
U.S. private equity entrepreneur Christopher Flowers is also interested in a potential bid, with the firm keen to expand its small regional lender One Savings Bank, according to the Financial Times on Monday.
RBS was ordered by European authorities to sell the branches, which have 1.8 million customers, as a condition of being bailed out by the government during the 2008 financial crisis. It could now ask for the deadline to be extended or to be allowed to keep the branches.
Sources told Reuters that RBS had received interest from Virgin Money, which lost out to Santander in the original auction, and others since Friday.
Another possible bidder is NBNK, the venture to buy UK banking assets that was set up by former Lloyd's of London insurance head Peter Levene and led by ex-Barclays executive Gary Hoffman. However, NBNK is being wound up after losing out to the Co-op in a battle to buy more than 600 branches from Lloyds Banking Group and would need to reverse that process.
Co-op's preoccupation with integrating the branches it purchased from Lloyds makes it an unlikely bidder. Metro Bank said on Sunday it was focused on organic growth, while Tesco Bank said it had no interest in buying branch networks.
Sweden's Handelsbanken, which is expanding rapidly in Britain, declined to say if it was interested in the branches but stressed that its focus in the UK was on growing organically.
RBS received a welcome boost last week when it successfully completed the initial public offering of its insurance arm Direct Line and later this month could exit a costly government insurance scheme.
But those milestones risk being overshadowed because the bank is expected to be next in line to be hit with a big fine for the manipulation of Libor global interest rates.
Santander's retreat will save it some capital and avoid a big increase in its British loan book and exposure at a time of strain in its domestic market and scrutiny of its capital and funding. Santander has been shedding assets and on Thursday sold 2.5 billion euros of loans to Bank of America Merrill Lynch.
Shares of RBS closed on Friday at 270.9 pence, meaning UK taxpayers are currently sitting on a loss of 21 billion pounds.