Project Verde, the code name for Lloyds Banking's enforced sale of hundreds of its branches, is close to completion after the part-nationalised lender signed non-binding heads of terms with the Co-operative Group, which wants to buy the branches.
The Co-operative Group (Co-op) will pay Lloyds an initial consideration of £350m, and up to an additional £400m in present value - equivalent to around £800m on a nominal basis - based on the performance of the Co-operative's combined banking business from completion up to 2027.
Completion of the sale is expected to go through by the end of November, at which point the Co-op will take control of 632 branches from the existing Lloyds network, and with them 4.8m customers, including 3.1m personal current account customers. The Co-op will also gain control of the TSB and Cheltenham & Gloucester (C&G) brands.
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The acquisition will see the Co-op add around £24bn of fully "matched" assets and liabilities to its balance sheet. The Verde business will have around £11bn of risk weighted assets on a standardised basis.
The Verde branches and customer collateral will be rebranded to TSB from summer 2013 and will transfer to the Co-operative at completion under this brand, the statement from Lloyds revealed.
The initial consideration will be funded through the sale by Co-operative of perpetual subordinated debt, underwritten by Lloyds. As well as picking up a few bob from underwriting the Co-op's debt issue, Lloyds will earn revenues from maintaining the information technology platform used by the Verde banks through a long-term service agreement.
Lloyds is expected to deliver the Verde business with £1.5bn of equity capital assuming a standardised capital model. Under an Internal Ratings Based (IRB) capital model and subject to regulatory approval, the equity capital requirement is expected to be in the range of £1.2bn to £1.4bn. Lloyds intends to apply for an IRB approach to be adopted prior to completion.
The completion of the divestment is currently expected to be recognised in Lloyds' 2013 financial statements. "We expect that the loss on disposal will be broadly offset by lower capital requirements from a reduction in the group's risk weighted assets," the company said, adding that the divestment is not expected to have a material effect on the future profitability of the group.
The sale of the branches, which critics have argued undermines what little commercial logic there was in the takeover of HBOS by Lloyds at the height of the credit crunch, has been mandated by European Union regulators after the £21bn bailout Lloyds received from UK government. The regulators argued that the bailout, together with Lloyds' dominant position in the UK mortgage market, gave it too much of a competitive advantage.
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