Project Verde, the name given to the planned sale of 630 Lloyds branches to the Co-Operative, is to seek a stock market flotation after the latter walked away from the deal.
Lloyds announced on Wednesday morning that despite the commitment of both parties to the transaction, the Co-op board has decided that they could no longer go through with the purchase of the Verde business.
The Co-op said the reason behind the decision was ""the impact of the current economic environment, the worsened outlook for economic growth and the increasing regulatory requirements on the financial services sector in general".
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Project Verde is a disposal mandated by the European Commission (EC) following Lloyds' bailout in the financial crisis. The bank is still 39%-owned by the government and has until the end of the year to offload the branches.
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The plan now for Lloyds is to go ahead with its 'Plan B' to create Verde as a stand-alone High Street bank called TSB Bank, divesting the business through an initial public offering (IPO) "in order to ensure best value for our shareholders and certainty for our customers and colleagues".
Chief Executive Officer Antnio Horta-Osrio said that while he was "disappointed" with the Co-op's decision not to go ahead with the deal, the new TSB Bank will be an "attractive retail and commercial bank [...] and will be a real challenger on the High Street".
While no timing has been given for the IPO, given that it will probably be subject to regulatory and EC approval, the company said that there will be no direct impact to customers as a result of the announcement.
Lloyds said: "Customers don't need to do anything and can carry on banking in the same way as they do now, accessing their accounts as usual via the branch, telephone and online banking.
"The group is committed to ensuring that the transfer to the TSB Bank is as smooth as possible for customers and will seek to minimise any disruption during this process."
