Regulatory concerns have forced Lloyds to push the alternative of a flotation up the agenda.
The two groups signed heads of terms last July after a saga that saw Co-operative Financial Services eventually see off rival NBNK Investments to win the bidding auction for the branches and other assets. The bank would initially be branded TSB.
But well-placed sources said last night that doubts have persisted about the mutual’s ability to complete the deal, mainly concerns at the Financial Services Authority about the capital strength of the Co-op’s banking arm.
In a statement yesterday Lloyds said: “We are continuing negotiations with the Co-op and are making good progress in creating a stand-alone challenger bank. We expect to have a separate TSB branded bank on the UK high street from the summer.”
A Co-op spokesman said only that negotiations were progressing well.
However, sources said an alternative possible flotation of the assets was now firmly back on the table.
Lloyds, 41 per cent owned by the taxpayer after its 2008 bail-out, has been ordered to sell the branches in return for the state aid it received after its disastrous takeover of HBOS.
Lloyds may update the market before its annual results are due on 1 March, possibly when the market opens on Monday.