Banco Santander SA’s decision to abandon its 1.7 billion-pound ($2.7 billion) purchase of 316 Royal Bank of Scotland Group Plc branches may prompt the U.K. lender to keep them or seek more time to find a new buyer.

RBS, Britain’s biggest government-owned bank, had been required to sell the outlets by 2014 to comply with a European Union state-aid rules after receiving the biggest banking bailout in the world in 2008.

“The likely situation is a deadline extension,” Gary Greenwood, a banking analyst at Shore Capital in Liverpool, said in a telephone interview yesterday. Regulators may let RBS delay the sale by three to five years, said Cormac Leech, a banking analyst at Liberum Capital in London.

Regulators may now be “a lot more flexible” because Britain’s consumer-banking market has become more competitive, RBS Chairman Philip Hampton said in Tokyo on Oct. 13. Richard Branson’s Virgin Money Holdings (U.K.) Ltd., U.S. investor JC Flowers and NBNK Investments Plc (NBNK) may all make separate bids to buy the branches, Sky News and the Sunday Telegraph said. Officials at the companies declined to comment on the reports.

Santander, Spain’s biggest bank, which walked away from the deal saying on Oct. 12 that it was withdrawing because of completion delays, said later that it remains “committed” to the U.K. market. The bank’s decision came against a backdrop of pressure on Spanish lenders to bolster capital amid mounting real estate losses at home and pain from the three-year-old euro-area sovereign debt crisis.

Brussels Talks

RBS Chief Executive Officer Stephen Hester said today that the bank will seek other ways to dispose of the branches. Chairman Hampton said it would be down to the British government to negotiate better terms with Brussels. A European Commission spokesman, Patrizio Fiorilli, said that the body doesn’t “have any comment at this stage.”

“RBS will commence a new process of disposal following discussion with the European Commission and will provide a further update on this in due course,” Hester said.

RBS fell as much as 4 percent in London trading and was down 2.2 percent at 265 pence as of 8:03 a.m. in London trading. The stock has climbed 31 percent this year.

Potential buyers including Virgin Money and NBNK Investments, who were interested in a larger Lloyds Banking Group Plc-owned package of branches, may see RBS’s branches as attractive, analysts Greenwood and Leech said. Still, any bids now are likely to be for far less than the unit’s book value of 1 billion pounds, according to Greenwood.

Northern Rock

“Virgin and NBNK are credible,” said Leech. “The question for NBNK is would they be able to raise the cash. I would have thought the answer to that would be yes.”

Simon Hall, a spokesman for Virgin Money, and an official at NBNK declined to comment.

Virgin Money agreed to buy part of Northern Rock Plc in November for 747 million pounds and moved its headquarters to Newcastle, the bank’s base. JC Flowers & Co. and NBNK also submitted bids for the bank, which the U.K. government took over in February 2008.

In June, Lloyds Banking Group Plc resumed exclusive talks to sell 632 branches to Co-Operative Group Ltd., prompting competing bidder NBNK to disband. More branches available may tempt NBNK to rethink its dissolution, said Leech.

RBS’s Hampton said the bank might try to see if the European Commission will let it keep the branches.

‘Pretty Severe’

“It used to be a pretty severe regime but they are making different judgments,” Hampton told reporters in Tokyo, where he held meetings on the sidelines of the International Monetary Fund’s annual gathering. “The U.K. retail banking market is more competitive now than it has been for decades.”

While aid to banks such as the European Central Bank’s longer term refinancing operations mean most banks have received some assistance, the similarity between the sale by Lloyds and RBS may make it difficult for RBS to keep the branches.

“The branches are profitable with a return on equity greater than cost of equity, and they are making good money,” Greenwood said. “Given the opportunity you’d want to hold on to the assets. The only problem is if they cave in on RBS and let them keep them, if you were Lloyds you’d ask why you can’t keep Verde.” Lloyds calls its branch-sale plan “Project Verde.”

RBS branches for sale include locations in England and Wales, as well as a business in Scotland. The unit had a 186 million-pound operating profit in this year’s first half and holds 21.7 billion pounds in customer deposits, RBS said. The sale also includes RBS’s National Westminster Bank branch network in Scotland, which the lender purchased in 2000.

Boosting Capital

Santander had agreed in 2010 to pay 350 million pounds more than the branches’ net asset value when the deal was scheduled to be completed, Edinburgh-based RBS said at the time. That valued the business at about 1.7 billion pounds.

Since then, Santander has sought ways to boost capital. The bank carried out an offering of as much as $4.09 billion in shares of its Mexican unit Grupo Financiero Santander Mexico SAB last month. Chairman Emilio Botin has said that the bank plans to list its biggest units within the next five years.

The Spanish bank’s purchase of RBS’s branches would have taken until mid-2014, or a year later than the February 2013 date set by the two banks for the completion of the deal, the Sunday Times said yesterday, citing a report by consulting company Accenture, which had been commissioned by the lenders.

U.K. Market

The acquisition would have allowed Santander to make loans to small and mid-size businesses, adding to its residential mortgage business. RBS’s Hampton acknowledged that lending to such companies had become less attractive recently.

“One of the reasons why Santander may have abandoned this deal is because overall profit expectations for banks in the U.K. aren’t as great as the market had forecast because of regulatory pressure,” said Inigo Lecubarri, who helps manage about $400 million at Abaco Financials Fund in London.

“Additionally, banks are being requested to boost their capital all around the world, and Santander may find some savings by pulling out of this deal at a very little cost.”