Co-op board to meet as talks with Lloyds over branches deal continue

ESCALATING speculation that the Co-op might pull the plug on talks to take over 600-plus Lloyds Banking Group branches following a crunch meeting of its banking board this week has been dismissed as “off beam” and premature.

Weekend reports said that a meeting of the board later this week was set to decide whether to proceed with the exclusive talks with Lloyds or definitively walk away from the so-called Project Verde assets.

It comes against the backdrop of the exclusivity agreement between the Co-op and Lloyds being extended at the end of March, partly due to regulatory concerns on whether the mutual could handle the doubling of its banking business, both in terms of boardroom financial expertise and the group’s capital cushions.

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However, it is understood that the Co-op banking board meeting was a previously scheduled one and, while an update on the talks with Lloyds will be the first item on the agenda, no decision is set to be taken on pursuing or abandoning the project.

Sources familiar with the situation also say that any recommendation of the banking board would have to go to a meeting of the full Co-op board for a final decision. No full board meeting is scheduled for this week, but it is understood further talks with Lloyds are expected between now and Friday.

The Co-op declined to comment yesterday. A spokesman for the Financial Services Authority (FSA) also declined to discuss its talks with the mutual.

The FSA is said to be concerned that although the Co-op’s subsidiary banking board has relevant experience of financial services, this is not mirrored on the mutual’s parent board.

As such, it is believed that the regulator has pressed the Co-op to put in place a structure that would put the entire company under the supervision of the FSA, rather than just its banking arm.

Crucially, banking analysts believe that would mean the Co-op having to hold an extra £3 billion of capital at group level. The mutual is not keen to do this because it believes it would starve its supermarket division and other businesses, such as funeral care, of funds.

The waters were further muddied late last week when NBNK Investments, the banking consolidation vehicle led by City grandees Lord Levene and Sir David Walker, made an indirect “alternative demerger” approach for the Project Verde assets.

Lloyds has always kept a possible straight flotation of the business on the table in case the talks with the Co-op fail.

NBNK lost out in the formal auction last December when Lloyds named the Co-op as the preferred bidder. It cannot talk to Lloyds about what was essentially a direct approach to the bank’s shareholders unless the exclusivity agreement with the Co-op is ended.

One source said: “The Co-op may or may not get the branches, and it is a highly fluid situation … But to say it all hangs now on a Co-op board meeting this week is just not true. That looks off beam.”

Lloyds was ordered to divest the branches by the European Commission in return for its taxpayer bailout in 2008.