* NAB in talks with NBNK, BBVA -sources
* NAB unlikely to go it alone in bid-sources
* NAB plans to spin off existing UK assets to JV - sources
* UK wants more branches sold, original sale plan continues (Adds details on prospect of more branches sold, shares)
By Narayanan Somasundaram
SYDNEY, April 13 (Reuters) - National Australia Bank is in talks with potential partners to jointly bid for 600 UK Lloyds Banking Group branches as it considers bulking up prior to an exit from Britain in 3 to 4 years, two sources said.
NAB, Australia's top lender, is in talks with a number of firms, including NBNK Investments Plc and Spain's BBVA, the people with direct knowledge of the early discussions said.
If NAB wins the bidding with a partner, it plans to spin off its existing UK assets into a joint venture and wait for favourable market conditions to steadily sell down its stake in the venture, the sources said.
The sources declined to be named as talks are confidential and may or may not succeed.
Lloyds, 41 percent owned by British taxpayers, has been ordered to sell the 600 branches by European competition authorities. But this week a powerful UK panel said it should sell more.
"NAB clearly does not want to put in big money in UK. It looks at it as a market fraught with risk and low growth. But they cannot sell the existing UK operations too now," one source said referring to the 400 branches NAB has in UK.
The sale of the branches, known as "Project Verde", is continuing as planned, according to a person familiar with the matter, despite Britain's Independent Commission on Banking (ICB) saying more branches should be offloaded to boost competition. Lloyds is lobbying hard against the need for more sales. A decision will not be made until September.
There was a limited list of potential buyers for the 600 branches, partly due to a funding gap that will come with the business -- as loans outweigh deposits -- of potentially over 15 billion pounds. The sale of more branches could widen that gap.
NAB CHALLENGE
NAB Chief Executive Cameron Clyne faces his biggest challenge yet: to bulk up in the UK or sell out. So far he has done neither and has said NAB is comfortable with the status quo.
The sources said bidding alone was almost out of the question given the 600 branches up for sale could be worth nearly $5 billion and the hefty funding gap could expose it to potential external shocks.
But even if the offer size is increased, NAB would still be interested and hopes any delay in the process will give it time to sew up a partner, one source said.
Six hundred branches would create Britain's seventh biggest bank or building society, with a 4.6 percent share of the current account market. After the ICB's comments analysts have estimated the bank may need to sell 900-1,000 branches.
NAB's current operations are considered too small to compete with Britain's biggest banks -- Lloyds, Barclays, HSBC, Royal Bank of Scotland and Santander UK.
But NAB has few options. Its UK unit has a book value of around $3.5 billion and a sale in current markets would fetch well short of that, forcing a big write-off.
That would not be taken lightly by investors who are warming up to Clyne's strategy to arrest the historic underperformance of the bank's shares.
"We will not do a fire sale just to move it off our books. Nor will we just put a silly acquisition to say we got scale," a NAB spokeswoman said, reiterating Clyne's earlier comments.
"His heart is just not in the UK, he wants to boost NAB's domestic retail franchise and turn it into the dominant player in wealth management," one source said, adding that Clyne realises time to bulk up is running out in UK. (Additional reporting by Steve Slater in London; Editing by Balazs Koranyi and Jon Loades-Carter)