LONDON Santander's (SAN.MC) British arm is gearing up for a stock market flotation next year or in 2015, once it has improved its balance sheet and expanded corporate lending, a senior executive said on Thursday.
Spanish parent Santander has separated and listed operations in some countries, including Mexico last year, and has said it will do the same for its UK arm when the conditions are right.
For now, an economic downturn and costly compensation for the mis-selling of financial products has created a tough backdrop for British banks and Santander UK -- which includes former building societies Abbey and Alliance & Leicester - is trying to consolidate its position in a fiercely competitive market.
It has been linked with a possible acquisition of National Australia Bank's (NAB.AX) UK business after it pulled out of a deal to buy 316 branches from Royal Bank of Scotland (RBS.L) last October.
The bank has denied it is in acquisition talks.
Santander UK's head of UK banking, Steve Pateman, said a flotation would not happen this year.
"We would like to do it," he told Reuters. "Our view is if we continue to make progress in building the banking franchise, continue to improve our balance sheet metrics and continue to grow our SME business, as we have done in the last 12 months, then it's something we could realistically look at for 2014 or 2015."
"Having decided not to progress with the RBS (RBS.L) transaction, the focus is on us to build the business in the UK that investors will find attractive," he said after the bank reported annual results.
Santander UK made a pretax profit of 1.23 billion pounds in 2012, little changed from 2011. Operating income fell 5 percent as funding costs rose but operating expenses dropped 9 percent as it pushed through cost cuts.
It set aside 232 million pounds for customer redress in its 2012 results, which it said included "conservative" provisions for potentially compensating customers for the interest rate swap mis-selling and for redress on products sold through a card protection partnership deal.
Britain's financial regulator opened the door on Thursday for billions of pounds to be repaid to customers after a study of interest rate hedging products sold to small firms found the vast majority were mis-sold.
The industry also faces a bill of around 200 million pounds to compensate customers who were sold card and identity protection insurance.
Santander did not increase its 538-million-pound provision made in 2011 for the mis-selling of payment protection insurance. The industry bill is set to top 20 billion pounds.
Parent group Santander raised provisions for bad loans sharply on Thursday after defaults rose in its home market and in Brazil, a key driver of earnings.
(Editing by David Holmes and Tom Pfeiffer)