U.S. Bancorp, the largest bank based in the Midwestern U.S., is the leading contender to buy the Chicago branches of Citizens Financial Group Inc. because smaller bidders are wary of raising capital to fund the deal, people with knowledge of the matter said.

The Minneapolis-based bank is in talks with Citizens, the U.S. subsidiary of Royal Bank of Scotland Group Plc, about buying 100 branches, said the people, who asked not to be identified because the information is private. The talks may not lead to a sale, and Citizens is still engaged with other potential buyers, one person said.

U.S. Bancorp is the largest of the lenders who expressed an interest in the branches, and others may have to raise funds to assume Citizens' liabilities and pay for the purchase, the people said. The branches hold $6 billion in deposits and $2.4 billion in loans, mostly home-equity lines of credit, the people said.

The sale, which could fetch $500 million, also drew interest from Fifth Third Bancorp, PrivateBancorp, Wintrust Financial Corp. and FirstMerit Corp., people familiar with the bidding said last month.

With $361 billion in assets at the end of September, and a market value of over $70 billion, U.S. Bancorp has long been interested in expanding in Chicago, among the largest and most fragmented markets in the U.S. 

IPO Plan

U.S. Bancorp has 72 branches in Chicago, according to data from the Federal Reserve. Buying Citizens' branches in the city would boost its market share of the region's deposits to 6th from 11th, the data show.

Citizens, based in Providence, Rhode Island, is working with Bank of America Corp. on the branch sale. Spokesmen for Citizens, U.S. Bancorp and Bank of America all declined to comment, while spokesmen at the other bidders didn't return calls seeking comment.

RBS, which is majority owned by the U.K. government, announced a restructuring this month that involves an initial public offering of Citizens in the second half of next year. Citizens has $118 billion in assets and about 1,400 branches in 12 states, according to its website.

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