CYBG confirms talks with RBS over Williams & Glyn branches

Following reports late on Tuesday, CYBG said in a statement on Wednesday morning that it "has engaged in discussions with RBS and has made a preliminary non-binding proposal" for the Williams & Glyn operations.

"This engagement is ongoing and there can be no certainty that any transaction will occur, nor as to the terms on which any transaction might be concluded," it said.

Such an acquisition would swell CYBG's total loans to around £50bn from current levels nearer £30bn, which would make it by far the largest of the 'challenger' banks.

CYBG has been rumoured to have begun working on the deal since August, after being floated in London by previous parent National Australia Bank in February.

RBS needs to sell W&G by 31 December next year as a condition of its 2008 taxpayer bailout, but has reportedly seen several interested buyers put off by the technological difficulties in separating the branch network and many thousands of accounts from the rest of RBS. Santander reportedly pulled out of talks last month due to a disagreement over price.

The taxpayer-owned bank valued W&G's loan book at £1.6bn earlier this year and RBS has spent close to that amount in its efforts to set it up as a standalone bank, although analysts predict an offer would come in at less than £1.3bn.

It was reported by Bloomberg that billionaire investor George Soros is among several short sellers betting against Clydesdale, while hedge fund Marshall Wace is betting against both RBS and CYBG.

On Wednesday, analyst Gary Greenwood at Shore Capital said striking a deal would represent a significant milestone for RBS as it needs to agree a disposal before the end of the year to avoid further intervention by the European Commission, including the potential appointment of a third party to oversee its sale.

"Disposing of W&G is also a key hurdle to overcome in terms of RBS being able to resume dividend payments/capital returns to shareholders and ultimately rid itself of Government ownership. We expect the shares to respond positively to this news."

But Jonathan Goslin at Numis was much less positive about the challenges management will face in "cleaning up such an old and sprawling business".

"In our view, CYBG already has more than enough problems of its own without even thinking about making such a sizeable acquisition. While a 2016E [return on tangible equity] of 3.8% does create opportunities for improvement, we are concerned about both the level of work that is required and the lack of success the previous parent NAB had in trying to do this."

As an example, Goslin cited that CYBG does not have enough data on 4% of its mortgage portfolio to even calculate the LTV.