A shake-up of high-street banking has been set in motion after Lloyds Banking Group agreed to sell 630 branches to the Co-operative Group for potentially less than a quarter of their estimated value.
Lloyds, which was ordered to sell the branches as part of its government bail-out terms, will receive an upfront cash payment of £350m for the business. It could receive a further £400m depending on the performance of the business over the next 15 years.
Even if these pay out in full – which would require the Co-op to hit ambitious return on equity targets between now and 2027 – Lloyds would receive about half of the branches’ £1.5bn equity value.
“A headline loss on disposal reflects Lloyds’ uncomfortable status as a forced seller and may underwhelm,” said Ian Gordon, an analyst at Investec Securities.
Lloyds turned down a higher bid of up to about £1.2bn from NBNK, an acquisition vehicle, although this carried a number of caveats that the bank did not expect to be met, according to people close to the process.
The agreed sale to the Co-op, which still requires final regulatory clearance, was heralded as a welcome boost to competition in the retail banking market.
Andrew Tyrie, chairman of the Commons Treasury committee said it “provides an important opportunity to increase competition and to ensure challenge to the big five banks”.
John Walker, chairman of the Federation of Small Businesses, said a new challenger bank would “open up competition and should help small firms access the cash they need”.
The Co-op will take on 4.8m Lloyds customers, including about 100,000 small businesses. It will become the UK’s sixth biggest bank, with almost 1,000 branches – 10 per cent of the country’s network – and 7 per cent of current accounts.
Peter Marks, chief executive, said the deal would propel the mutual into the top tier of banking in the same way its £1.6bn purchase of Somerfield lifted it to the “Premier League” of retailing in 2008.
“This is the biggest thing to happen in retail banking in a generation,” he said. “We are a brand that people trust and that is something sadly lacking in the banking industry today.”
Lloyds will transfer up to £2bn capital with the business – £1.5bn of equity and £500m of tier-two debt – and will underwrite a £350m debt issuance to fund the sale.
Should the Co-op qualify for “advanced” status under the Financial Services Authority’s ranking of banks, Lloyds would provide £100m-£300m less capital.
Paul Pester, who has led the sale process for Lloyds, will join the Co-op as chief executive of the enlarged banking business.
Analysts said the loss on the disposal would be partly offset by the fact that Lloyds is selling fewer assets than anticipated, so should not lose as much income.
The business – codenamed Verde – is expected to have about £24bn of loans and deposits by the end of 2013, when the deal is due to be completed. Originally Lloyds had planned to sell about £60bn of loans and £30bn of deposits.
Additional reporting by Adam Jones
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