Lloyds Eyes Branches Float Amid Co-op Doubts

Millions of high street bank customers face further uncertainty amid growing concern that a takeover of more than 630 branches by the Co-operative Group will be abandoned.

I have learnt that Lloyds Banking Group (LSE: LLOY.L - news) , which is 41%-owned by UK taxpayers, is stepping up plans for a flotation of the branches despite having agreed an £800m sale to the Co-op last year.

The move has been triggered by doubts about the ability of the two sides to complete the deal, according to people familiar with the discussions between the two banks.

One insider said this week that the Co-op was in active talks with the Financial Services Authority (FSA) about a string of issues related to the deal, one of which was about the capital position of its banking division.

"There has been no change in the tone of the discussions with the regulator," a person close to the talks said.

Codenamed Project Verde, the 632-branch network has to be sold in return for the state aid required to rescue Lloyds at the height of the 2008 banking crisis.

If the deal does collapse, it would be the second-such abandonment following Santander UK's withdrawal from a deal to acquire more than 300 branches from Royal Bank of Scotland (LSE: RBS.L - news) (RBS) late last year.

People close to Lloyds insisted that its preferred option remained the deal with the Co-op but conceded that it was accelerating preparations for a demerger of the Verde business onto the public markets.

In a statement on Friday, a Lloyds spokesman said: "We are continuing negotiations with Co-op and are making good progress in creating a stand-alone challenger bank. We expect to have a separate TSB (KOSDAQ: 045340.KQ - news) branded bank on the UK high street from the summer."

The Co-op is likely to provide an update on the Verde talks when it announces annual results at the end of March.

A collapse of the deal would be an embarrassment to George Osborne, the Chancellor, who has hailed the takeover by the Co-op as an important step towards fostering greater competition in Britain's high street banking market.

The Verde network has well over three million customers and a market share that would alone make it Britain's seventh-biggest bank.

Growing pressure on UK lenders to bolster their capital positions from the new Financial Policy Committee of the Bank of England has, however, placed greater focus on the structure of the Verde deal, according to people close to it.

The Co-op declined to comment.