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NBNK Investments, a new bid vehicle run by Lord Levene, has taken a step towards convincing Lloyds Banking Group that it could be a viable bidder for its 600 branches.

Having been sidelined by Lloyds last year – in favour of a more attractive bid from The Co-operative Group - NBNK was invited back into the auction process in April.

It said on Friday that talks to buy the branch portfolio Lloyds has to sell to comply with state aid rules were progressing well and that the Financial Services Authority was satisfied with its efforts to address regulatory issues.

NBNK’s comments came as it reported a pre-tax loss of £23m for 2011 - a sharp increase on the £1.8m loss a year earlier. Since its launch in 2010, the group has burnt through almost half of the initial £50m it raised from investors to pursue banking assets in the UK.

Last year’s loss reflected administrative expenses including a £1.85m “golden hello” for Gary Hoffman, chief executive, when he joined from Northern Rock in May 2011.

Mr Hoffman also received salary and benefits worth £913,000 last year and was awarded about £15m of share options which are due to vest over a six-year period as long as he oversees a “substantial” acquisition within 18 months.

Lord Levene, NBNK’s chairman who in October moved to three days a week rather than one, received a salary of £305,000 in 2011, compared with £47,500 in 2010.

Lloyds wrote to Lord Levene in April requesting a commitment that NBNK’s bid would win regulatory approval. The bank also wanted more details on price – NBNK increased its bid from £1.5bn to closer to £2bn.

The vehicle has since held a series of meetings with Lloyds to clarify its proposal and said it had answered questions from the regulator.

“The FSA has confirmed to NBNK that the process of engagement is satisfactory from its point of view at this stage,” said NBNK in its annual report.

Lloyds said it was now sharing more information with the bidder, so it could provide “further clarity on other aspects of their offer”.

However the bank still views the Co-op as its preferred bidder and is working towards floating the branches as a back-up plan if talks with the mutual collapse.

The Co-op’s attempts to seal a deal with Lloyds have been hampered by its failure to convince the FSA that it has adequate governance and systems to run a much larger bank. The mutual is still working with Lloyds to establish a management team and IT functions that would satisfy the regulator and a final decision on its bid is expected by the end of this month.

NBNK also made unsuccessful attempts to buy the “good” part of Northern Rock and Clydesdale and Yorkshire Bank, the UK arms of National Australia Bank.

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