* Corsair-led consortium sees off competition for 314 RBSbranches
* Group to pay 600 mln stg for minority stake
* RBS reviving Williams & Glyn's brand for UK "challenger"bank
* Church of England among investors in consortium
By Steve Slater
LONDON, Sept 27 (Reuters) - The Church of England is backinga new "ethical" British bank which will be created out ofbranches sold by Royal Bank of Scotland.
RBS dusted off the dormant Williams & Glyn's brand whichdates back 260 years, to rename the 314 branches it was orderedby European authorities to sell in return for receiving ataxpayer bailout in 2008.
The new bank is expected it to be a "challenger" to theexisting big four names on Britain's high street, with aparticular strength in small business banking.
The Church of England said Williams & Glyn's will operate"to the highest ethical standards".
British banks have been hit by a series of mis-sellingscandals and huge compensation payments over recent years,involving the sale of pensions, insurance and endowmentmortgages.
RBS said on Friday it had picked the consortium led by U.S.private equity firm Corsair, which bid 600 million pounds ($960million) to take "a significant minority stake" of up to 49percent in the new bank when it lists on the stock market.
That is likely to take place in 2015, said John Maltby, whofronted Corsair's winning bid in an auction and is chiefexecutive designate of the Williams & Glyn's business.
"This is a great opportunity to bring some more competitionto banking in the UK," Maltby said in an interview.
The deal will enable RBS to share in any upside if bankvaluations improve.
Rival Lloyds Banking Group is also separatinghundreds of branches to create a new bank. Lloyds this monthrenamed 630 branches as TSB and plans to float them next year.
Corsair's team includes U.S. private equity firmCenterbridge, the Church of England's investment fund and RITCapital Partners, an investment trust of Lord Rothschild.
It had emerged in the past few weeks as the front-runner forthe deal, seeing off competition from a Blackstone-led consortium and from W&G Investments, a group of investors.
RBS had agreed to sell the branches, dubbed Project Rainbow,to Santander for about 1.65 billion pounds, but thatdeal collapsed a year ago.
OLD NAME REVIVED
Williams & Glyn's origins date back to 1753 and the name hasbeen dormant for almost 30 years.
"I well remember the Williams and Glyn's brand. In the1980s...they had a very strong values system, and that is evenmore important today in banking," said Mervyn Davies, the formerCEO of Standard Chartered who is vice chairman ofCorsair.
Maltby said the investment by the Church of England was"material". The Church Commissioners manage 5.5 billion pounds,and its returns support Church of England work, missionactivities, pay for cathedral costs and run the payroll forserving and retired clergy.
Williams & Glyn's has nearly 1.7 million customers andemploys around 4,500 people, and is likely to have 6,000 staffin the future, RBS said. It has a 5 percent share of the UKmarket for small business banking and about 2 percent ofpersonal current accounts.
The task of separating the branches and the need to splitthe legal entity means it will take some time for the businessto be ready for its own stock market listing.
The deal values the branches at a minimum of 1.2 billionpounds. Some estimates have put a value of 1.5 billion pounds onthe network, which would give the Corsair group a 40 percentstake for its investment.
Under the structure of the deal, RBS has issued a 600million pound bond to the investors, which will be exchangeableinto shares at the time of the listing. RBS will pay annualinterest of between 8 percent and 14 percent on the bond.
The branches have 19.7 billion pounds in loans and 22.2billion pounds in customer deposits and made an operating profitof 168 million pounds in the first half of this year. Thebusiness made a post-tax return on equity of about 16 percent,well above the levels that most banks in Europe are generating.
Philip Green, the former CEO of United Utilities, adirector of Lloyds and an advisor on corporate responsibility tothe UK Prime Minister, is due to become chairman of Williams &Glyn's prior to its stock market listing. Maltby was previouslyhead of commercial banking at Lloyds.
RBS was advised by UBS on the deal and the Corsairconsortium was advised by HSBC and Barclays.
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