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Under Project Rainbow, The Royal Bank of Scotland Group plc (RBS - Snapshot Report) has sold some of its branches to private equity firms Corsair Capital and Centerbridge. Corsair Capital and Centerbridge have invested roughly £600 million and plan to reinstate these branches as a new bank.

U.S.-based Corsair Capital has teamed up with Centerbridge as well as other investors including the Church of England's investment fund and Standard Life Investments in bidding for these branches. However, the private equity group will take on the role of the anchor shareholder and wait for the venture to break even at the price at which it was acquired, before the initial public offering (IPO) of the new bank. The IPO is anticipated to take place in 2015.

The branches on sale are Natwest branches in Scotland and the parent company’s branches in England and Wales. These have roughly £21.5 billion in consumer deposits and serve small businesses and consumers.

Apart from Corsair Capital and Centerbridge, other final round bidders included W&G Investments Plc, the investment vehicle headed by Tesco PLC’s (TSCDY) former director of finance, Andrew Higginson. Another bid was also made by AnaCap Financial Partners, in collaboration with U.S. private equity giant The Blackstone Group L.P. (BX - Analyst Report).

Royal Bank of Scotland is yet to tide over its troubles and remains 81% owned by the U.K. taxpayers. Further, private ownership looks unlikely in the near future. The bank has been ordered by the European Union to sell as many as 315 branches to comply with state-aid regulations.

After years of muted approach, the Treasury is adopting a proactive strategy toward The Royal Bank of Scotland. The British administration had demanded reduction of both the bank’s investment unit and U.S. unit and requires the bank to refocus on its U.K. business.

In compliance with the orders, Royal Bank of Scotland divested its stake in Global Merchant Services (WorldPay) and RBS Sempra Commodities. It has also initiated the spin-off of the insurance business as the Direct Line Group through an IPO.

However, we are encouraged by Royal Bank of Scotland’s efforts to restructure its business. With the divestment of its non-profitable units, we believe that the bank will be able to regain its former glory.

Royal Bank of Scotland currently carries a Zacks Rank #4 (Sell). A well-performing foreign bank is Sumitomo Mitsui Financial Group, Inc. (SMFG - Snapshot Report), which carries a Zacks Rank #1 (Strong Buy).

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