Co-op acquisition of 630 Lloyds branches will boost competition

The Co-operative Banking Group is close to agreeing terms to complete the purchase of 630 branches of Lloyds Bank.

The sale of the 630 Lloyds branches to the Co-op will triple the size of the Co-op’s retail banking business and take its market share of UK banks to around ten per cent and 900 branches. It means the Co-op will hold a seven per cent share of the UK's current accounts.

The deal is expected to increase competition in the sector and it is hoped this will benefit customers through better customer service, innovative new products and cheaper banking.

The deal goes ahead at a time when more customers are saying that they are disillusioned with the big four banks. A survey last week by Moneysupermarket said that 20 per cent of current account customers planned to switch their bank. Howevder, this has yet to translate into actual switching.

Brits are notorious for not switching current account providers and the industry will be keen to see whether any new current account products and banks are able to persuade customers after the recent banking scandals affecting Barclays and NatWest.

The deal will see the Co-op acquire the branches at a discount price of around £800 million, well below the total of £1.5 billion that had previously been mooted. The deal is expected to be announced later this week following the bank's latest board meeting.

Lloyds Banking Group was ordered to sell the branches to comply with European Union state aid rules. The sale has been delayed because of problems over how the branches would be integrated into the existing network.

Despite Lloyds exclusive agreement with the Co-op ending in April, Lloyds judged that the Co-op deal was more favourable than a rival bid by NBNK Bank or an alternative structure that would see Lloyds float on the market.

It is likely Lloyds will make an initial payment of £400 million and then pay a further £400 million over five years.

The discount price that the Co-op could pick up the Lloyds branches is lower than anticipated because of deterioration in market conditions and by a fall in mortgage loans to ensure assets and liabilities are more evenly matched. The new arrangement would see the 630 branches use Lloyds IT and security systems and backroom processing staff.

In return, the Co-op will have to pay an annual commercial fee of tens of millions of pounds for the use of the facilities. Details of this arrangement and the pay deals for the new senior management team have not yet been made public.

Earlier this week, Labour leader, Ed Miliband called for UK high street banks to sell of at least 1,000 branches to help create two more big lenders to increase competition in the banking sector.

The sale of the 630 Lloyds branches to the Co-op will triple the size of the Co-op’s retail banking business and take its market share of UK banks to around ten per cent and 900 branches.

The Co-op was chosen by Lloyds as its preferred bidder in December but the sale has been delayed as negotiations with regulators have taken place.

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