Co-operative hits further problems in its bid to take over Lloyds branches

Lloyds Banking Group’s sale of 632 branches to The Co-operative Group has run into difficulties as financial regulators question the level of expertise on the suitor’s board.

The Manchester-based Co-op held what sources described as “embarrassing” recruitment talks with the chief executive of what was its main rival in the £1.5 billion auction for the Lloyds branches.

It is understood the Co-op held discussions with Gary Hoffman, chief executive of NBNK Investments, in an effort to counter regulatory pressure to strengthen its banking management team after being made preferred bidder by Lloyds before Christmas.

But Hoffman and NBNK – a vehicle set up to consolidate the UK banking sector – are understood to have instead turned their attention back to trying to acquire Clydesdale and Yorkshire banks, currently owned by National Australia Bank. The parent has put NAB UK under strategic review.

The talks between the Co-op and Hoffman, a former chief executive of Northern Rock in the clean-up stage after its nationalisation, are believed to have been in the past six weeks. It is understood they involved headhunter Whitehead Mann, but no job offer was made and the talks have been discontinued.

Sources said that the Co-op may have thought Hoffman would be looking for an exit if NBNK, which has the backing of major City institutions, had to be wound up without making an acquisition.

One source said: “This will be embarrassing for the Co-op as it seems to fit with concerns at the Financial Services Authority that the parent board of the company does not have the required banking expertise to acquire the Lloyds branches and triple the size of its banking network.

“It also puts Hoffman in an interesting position. Either succeed with NBNK in buying Clydesdale and Yorkshire banks, but with a backstop option if that doesn’t come off of possibly parachuting into the Co-op.”

City sources say the Co-op has countered regulatory concerns by pointing to its subsidiary banking board beneath the group board that it claims has the necessary financial expertise to handle the Lloyds network acquisition.

Lloyds and the Co-op are expected to update the market on their negotiations on the sale at the end of this month, when the mutual group is also due to post its trading results for 2011. Neither the Co-op or NBNK would comment yesterday.