By Steve Slater
RBS dusted off the dormant Williams & Glyn's brand which dates back 260 years, to rename the 314 branches it was ordered by European authorities to sell in return for receiving a taxpayer bailout in 2008.
The new bank is expected it to be a "challenger" to the existing big four names on Britain's high street, with a particular 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-selling scandals and huge compensation payments over recent years, involving the sale of pensions, insurance and endowment mortgages.
RBS said on Friday it had picked the consortium led by U.S. private equity firm Corsair, which bid 600 million pounds to take "a significant minority stake" of up to 49 percent in the new bank when it lists on the stock market.
That is likely to take place in 2015, said John Maltby, who fronted Corsair's winning bid in an auction and is chief executive designate of the Williams & Glyn's business.
"This is a great opportunity to bring some more competition to banking in the UK," Maltby said in an interview.
The deal will enable RBS to share in any upside if bank valuations improve.
Rival Lloyds Banking Group (LLOY.L) is also separating hundreds of branches to create a new bank. Lloyds this month renamed 630 branches as TSB and plans to float them next year.
Corsair's team includes U.S. private equity firm Centerbridge, the Church of England's investment fund and RIT Capital Partners, an investment trust of Lord Rothschild.
RBS had agreed to sell the branches, dubbed Project Rainbow, to Santander (SAN.MC) for about 1.65 billion pounds, but that deal collapsed a year ago.
OLD NAME REVIVED
Williams & Glyn's origins date back to 1753 and the name has been dormant for almost 30 years.
"I well remember the Williams and Glyn's brand. In the 1980s...they had a very strong values system, and that is even more important today in banking," said Mervyn Davies, the former CEO of Standard Chartered (STAN.L) who is vice chairman of Corsair.
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, mission activities, pay for cathedral costs and run the payroll for serving and retired clergy.
Williams & Glyn's has nearly 1.7 million customers and employs around 4,500 people, and is likely to have 6,000 staff in the future, RBS said. It has a 5 percent share of the UK market for small business banking and about 2 percent of personal current accounts.
The task of separating the branches and the need to split the legal entity means it will take some time for the business to be ready for its own stock market listing.
The deal values the branches at a minimum of 1.2 billion pounds. Some estimates have put a value of 1.5 billion pounds on the network, which would give the Corsair group a 40 percent stake for its investment.
Under the structure of the deal, RBS has issued a 600 million pound bond to the investors, which will be exchangeable into shares at the time of the listing. RBS will pay annual interest of between 8 percent and 14 percent on the bond.
The branches have 19.7 billion pounds in loans and 22.2 billion pounds in customer deposits and made an operating profit of 168 million pounds in the first half of this year. The business 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 (UU.L), a director of Lloyds and an advisor on corporate responsibility to the UK Prime Minister, is due to become chairman of Williams & Glyn's prior to its stock market listing. Maltby was previously head of commercial banking at Lloyds.
RBS was advised by UBS on the deal and the Corsair consortium was advised by HSBC and Barclays. (Editing by Elaine Hardcastle)