Plans to create major lender hit as Lloyds sale collapses

State-controlled bank left looking at a flotation of new TSB business as Co-op walks away from Project Verde after more than a year of talks

The Co-operative Bank has pulled out of a £750m deal to buy more than 600 branches from Lloyds Banking Group in a move critics described as "false start" for the high street banking revolution.

After more than a year of negotiations, the mutual blamed the faltering economy and increasing costs of bank regulation for the failure.

Lloyds said it will now float the 632 branches rebranded as TSB separately on the stock market. It will also have to rebrand its remaining 1,200 branches, dropping the TSB name off the end.

The failure of the deal, known as Verde, is a blow to the Government, which not only wanted to see the deal through so it could start planning the sale of its 39 per cent stake, but also because a combined Co-op/TSB could have created a substantial challenger to the high street banks.

Chris Leslie, the shadow Financial Secretary to the Treasury, said: "This is not only bad news for the Chancellor but for consumers too. We need more competition in the banking sector – including a greater role for mutuals – to give customers and businesses a better deal.

"The Co-op has said its decision is due to the worsened outlook for economic growth. This should serve as yet another warning to George Osborne that his economic plan is failing and he must urgently act to kick-start our flatlining economy."

Peter Marks, the Co-op's outgoing chief executive, said: "Against the backdrop of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general, the Verde transaction would not currently deliver a suitable return for our members within a reasonable timeframe and with an acceptable level of risk."

Lloyds' chief executive, Antonio Horta-Osorio, said that he was "disappointed" the deal could not be done. He added: "The TSB Bank will be an attractive retail and commercial bank with around 630 branches across the UK, a strong management team and a real challenger on the high street."

A stock market flotation is unlikely to be ready soon enough to hit the European Commission's deadline of the end of this year, imposed after the £20bn taxpayer bail-out of Lloyds.

Lloyds could not say how much money it had spent on the deal or how much rebranding would cost. It pointed out it had always taken a "twin track" approach to the sell-off but admitted that flotation was its "Plan B."

The TSB branches serve some 4.6 million customers in the UK and has about 5 per cent of the current account and mortgage market and 10 per cent of the country's bank branches.

Any initial public offering of shares in TSB will have to be cleared by UK and European regulators. It is also unclear whether Lloyds would be able to sell 100 per cent of the business in one go.

Last October a similar enforced branch sale by Royal Bank of Scotland also collapsed. Santander offered £1.65m for the 316 branches but said it could not complete the deal "within a reasonable timeframe" while keeping the business in a "steady state".

Michael Ossei, at uSwitch.com, said: "The purchase by the Co-op would have shaken up the high street. The new TSB brand has an opportunity to stand out from the crowd and only time will tell whether it will rise to the occasion."

TSB: Two centuries of saving

1810

The Rev Henry Duncan launches the Ruthwell Parish Bank in Dumfriesshire, the world's first self-supporting savings bank, designed for the poorer members of his parish. Within eight years there were more than 450 savings banks in Britain.

1887

After a major fraud the previous year at the Cardiff Savings Bank, where £30,000 was embezzled, the Trustee Savings Banks Association is set up with the aim of protecting investors and encouraging relationships between savings banks.

1951

Deposits in trustee savings banks reach £1bn for the first time after they flourish during the two world wars, during which they sold government stocks.

1976

The TSB Act unifies the 73 existing savings banks, merging them into 20 regional institutions (a number later cut down to 16), which were overseen by a central board.

1986

TSB Group floats on the stock market, raising over £1.2bn off the back of a major advertising campaign.

1987

TSB launches the UK's first telephone banking system, Speedlink.

1995

Lloyds and TSB merge to create Lloyds TSB, although it takes until 1999 for branches to be completely rebranded.

2009

Lloyds agrees to Brussels' demands that it sells off hundreds of branches in order to receive state aid.