LONDON/MADRID - Spanish bank Santander is considering the sale of a minority stake in its UK arm through a stock market flotation to potentially repeat a windfall from a Brazilian spinoff last year, industry sources said on Monday.

Analysts and industry observers have been speculating about a potential public share offering for Santander's fast-growing UK arm since the euro zone's largest bank struck gold with the market debut of its Brazilian subsidiary in October last year.

The sources said several investment banks pitched the London IPO idea to Santander executives as part of broader fundraising strategies and the idea was being considered by the bank.

Proposals remain sketchy and no date or details have been set, however, and could depend on planned regulatory changes.

Santander declined to comment.

Santander's UK arm, which makes up around 16 percent of the Spanish group's profits, is one of the market's most lucrative lenders, built up through the acquisition of high street names Abbey, Alliance & Leicester and Bradford & Bingley.

Chairman Emilio Botin has said the bank aims to grow organically in Britain, though it would look at acquisition opportunities. It is looking at more than 300 branches being sold by Royal Bank of Scotland, which would boost Santander's presence in UK commercial banking, one source said.

Asked about an IPO of the UK business last week Botin said nothing is foreseen at present.

REPEATING BRAZIL'S SUCCESS?

As with Brazil, Santander will likely retain a majority stake in the UK arm, and it is also expected to woo investors with a generous dividend yield and a lucrative payout ratio.

Less clear is the motivation for an offering in the near term, as the UK market recovers from a painful recession.

Proceeds from the bumper Brazilian IPO, widely recognized to have hit a timing sweet spot, were used to expand the arm's branch network, automatic tellers and improve capital ratios.

But with capital not an issue for the British unit -- particularly after a 2008 injection of 1 billion pounds ($1.56 billion) -- analysts say acquisitions would likely be a primary motivation, alongside raising the group's profile not long after a rebranding as Santander across the UK network.

Andrew Lim, analyst at Matrix Group in London, said a UK float would also help shield the group against more losses on bad debts in Spain and higher funding costs as concerns have mounted about debt risks in Spain and elsewhere.

It would be a defensive move by Santander to try to raise money in order to offset the tidal wave of Spanish loan losses coming their way and the potential increase in refinancing costs. The sovereign risk is a big deal for them, Lim said.

Lim said the Brazilian IPO allowed it to book a 2.5 billion euros ($3.42 billion) capital gain to provision for Spanish loans and real estate.

One major potential hurdle, however, is regulatory uncertainty, particularly fog surrounding proposals from the international regulator, the Basel committee, which would currently force banks selling minority stakes to still account for all of subsidiaries' capital needs.

Santander's capital position is sound, core capital at 8.6 percent end-December, analysts at bank Espirito Santo said.

Therefore we shouldn't expect a partial listing in the short-term until uncertainties are cleared and the bank has more visibility regarding minority interest impact in capital ratios.

(Additional reporting by Steve Slater in London; Editing by Greg Mahlich and Mike Nesbit)

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