LONDON: Lloyds Banking Group has agreed to sell 632 branches to the Co-operative, a deal mandated by regulators in an effort to boost competition in British banking while preventing Lloyds from benefiting unfairly from its state bailout four years ago.
Mutually-owned Co-op said the deal would boost its share of Britain's branch network to 10 percent from less than four percent, creating a new force in retail banking capable of taking on Britain's dominant lenders.
"People have lost trust in the financial services sector. Now we can provide a big bank, a challenger bank, that people can really trust," Co-op Group CEO Peter Marks told reporters on a conference call.
Lloyds, ordered by regulators to offload the branches as payback for its state-funded rescue, said it would make a loss on the sale but that this would be counterbalanced by lower capital requirements. There will be no lasting impact on group profit.
"We believe the cooperative will be a good owner for our business, customers and colleagues, and the combined banking business will be a significant competitor on the high street," Lloyds CEO Antonio Horta-Osorio said.
Lloyds, which had been expected to raise as much as 1.5 billion pounds ($2.34 billion) from the sale, will receive just 350 million pounds up front.
It also stands to collect further payments spread out until 2027 with a present value of 400 million pounds, depending on how the newly-created business performs.
The Coop's Marks said Britain's financial regulator was "very pleased" the new bank would use Lloyds' proven IT platforms, reducing the risk of computer glitches of the kind that disrupted payments at Royal Bank of Scotland's NatWest unit last month.
But he denied press reports that the Financial Services Authority had raised concerns that the Coop's board lacked banking experience.
"Never once in all of my meetings with the FSA, and there have been plenty, have the FSA raised any questions about our banking board or our group board," he said.
The new bank will be led by Lloyds executive Paul Pester, who was appointed in May 2011 to run the branches earmarked for sale in case Lloyds opted to list them separately instead.
Lloyd's shares were flat by 0815 GMT, in line with the FTSE 100 share index.
News of the deal was welcomed by the UK government which has championed a shake-up in UK banking and the promotion of mutually-owned financial businesses.
Chancellor of the Exchequer George Osborne said: "This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy."
The banking sector's public image, tarnished by the 2008 crisis, has taken a further knock this year due to scandals including the widespread mis-selling of loan insurance, NatWest's IT problems, and news that Barclays traders rigged a key interbank lending rate.
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