Blow for NBNK as Co-op is set to buy Lloyds branches

Lord Levene's bid to create a new force in retail banking was thwarted for a second time last night after Lloyds Banking Group said it planned to sell more than 632 branches to the Co-op in a deal worth up to £1.5bn just hours after a last-ditch bid to scupper the tie up.

The City grandee and former Lloyd's of London chairman was the driving force behind the creation of NBNK, which hoped to spirit away the branches – being sold as "Project Verde" – after being allowed back into the bidding when its rival appeared to be floundering amid regulatory concerns.

But last night Lloyds said Co-op was again its preferred bidder and would again be granted exclusive talks, appearing to finally slam the door on NBNK, which had appointed the former Northern Rock boss Gary Hoffman to spearhead its bid and pledged to create a traditional "simple" bank.

Lloyds said: "The Group has made considerable progress with the Co-operative Group on the Verde transaction. The Group and Co-op now have an understanding on the commercial terms for the transaction. This is subject to agreeing satisfactory documentation, the approval of their respective boards and further discussions with the FSA, HMT and the European Commission." The bank said the exclusivity had been granted to allow it to proceed with negotiations expected to lead to the signing of a much-delayed "Heads of Agreement" between the two institutions.

News of Co-op's apparent victory will come as a bitter blow to Aim-listed NBNK, which could now face being wound up thanks to the lack of available targets. At its annual meeting in London, NBNK said it had submitted a revised proposal in a final effort to draw the deal away from Co-op. But the attempt failed and the deal looks set to proceed with the latter having satisfied regulators that it can cope with a transaction that will triple its bank's size and make banking by far its biggest business operation.

That will likely see Co-op's existing bank reversed into Verde with capital from its huge retail arm used to underpin the banking operation.

If NBNK loses the race to buy the 632 Lloyds branches it will be another major blow after it previously failed to snap up Yorkshire and Clydesdale branches from Australia's NAB