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Lloyds sells 632 branches to Co-operative Group

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The Co-operative Group today hailed its deal to buy 632 Lloyds Banking Group branches for up to £750 million as “the biggest shake-up in high street banking for a generation”.

The group said it will become a "new challenger" in British banking after announcing the long-awaited agreement, which will triple the size of its banking arm to nearly 1,000 branches and increase its share of UK branches to around 10%.

It is seen as a cut price deal for the Co-op, with the group agreeing to pay Lloyds - which is 40% owned by the Government - £350 million upfront and a potential further £400 million by 2027.

However, the price tag is far short of the £1.5 billion first mooted.

Part-nationalised Lloyds admitted it would suffer a loss on the sale, although it said this would be offset by a fall in the amount of capital it has to hold on its balance sheet.

The Treasury welcomed the announcement, which it said formed part of a raft of measures to reform the banking system and improve competition.

The deal will transform the Co-op into a major player in British banking, bringing around 4.8 million customers to the mutual, meaning the combined business will see its share of the current account market soar from around 2% to nearly 7%.

Five years ago, the Co-op had just 90 banking branches.

Chancellor George Osborne said: "This is another step towards creating a new banking system for Britain that gives real choice to customers and supports the economy.

"The sale of hundreds of Lloyds branches to the Co-operative creates a new challenger bank and promotes mutuals.

"This follows the sale of Northern Rock to Virgin Money in January and represents another important step towards a more competitive banking sector."

Around 8,000 staff are expected to transfer with the deal, including around 3,000 support staff in call centres and administration sites, and the Co-op said it aimed to retain employees.

David Fleming, national officer for trade union Unite, which represents staff at both banks - said: "This brings to an end a long period of uncertainty for the staff, who will welcome the clarity this decision will bring."

Lloyds said there would be no changes for the 4.8 million customers affected by the deal until next year.

It will communicate with all its customers about the changes and clients of the branches being sold will be given the chance to transfer to the Co-op or remain with Lloyds.

Lloyds said it will provide more clarity on the process once the deal has been finalised.

Peter Marks, group chief executive of the Co-op, said he had driven a "good deal" for its members.

But he added it was a "fair price" reflecting the current conditions in the banking sector and stressed the taxpayer will share in the future profits of the enlarged bank under terms of the deal.

He said: "This deal would deliver the biggest shake-up in high street banking in a generation.

"It would be a great deal for customers because it would make the services of our member-owned, customer-led, ethically-driven, bank available to millions of people we've not been able to serve up until now."

Today's announcement comes after lengthy talks and mounting speculation that the deal was on the rocks.

Lloyds, which is offloading the branches to meet European Union rules on state aid following its Government bailout, chose the Co-op as its preferred bidder in December.

But the sale plans suffered a series of delays and initial hopes to sign a deal by the end of March were dashed due to protracted talks with regulators.

Some assets originally expected to be included in the deal have also been dropped, such as the Intelligent Finance business.

It is understood Lloyds will now be forced to close the IF internet banking business, as it was earmarked to go as part of divestments to appease the EU.

The Co-op denied reports that the Financial Services Authority (FSA) had been concerned about governance at the mutual.

Paul Pester, who was promoted by Lloyds to head the branch business known as Verde, will become the new chief executive of Co-op Banking, replacing acting chief executive Barry Tootell.

It is unclear what position Mr Tootell will take on, but he is expected to remain after the deal completes.

The management team at Verde is also due to transfer over to the Co-op, while Lloyds has agreed to underwrite the debt Co-op will sell to pay for the deal and will let the Co-op use its IT platform for the branches.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said today's announcement comes after a "long and arduous journey".

He added: "A conclusion of the sale is to be welcomed. Management focus on running the bank is strengthened and the removal of the Government as a major shareholder is now likely to receive greater emphasis."

The deal, which is expected to complete by the end of November 2013, is also seen as good news for retail customers and firms.

John Walker, national chairman of the Federation of Small Businesses, said: "This is good news. With four in 10 small firms refused credit by the main high street banks, this challenger bank will open up competition and should help small firms access the cash they need."

But the Co-op must use its status to provide a "real alternative to other banks with a focus on straightforward products and excellent customer service", according to Sarah Brooks, director of financial services at Consumer Focus.