Co-op victor in Lloyds battle

Part-nationalised Lloyds yesterday said it is in exclusive talks with the Co-op, and also revealed its chief executive will return to work in the new year after time off due to extreme fatigue.

The bank said António Horta-Osório has been given a clean bill of health by doctors, and will return on January 9 to a diminished workload.

“He believes and we believe that he overdid it; it was certainly not stress,” said Lloyds chairman Sir Win Bischoff. He added Mr Horta-Osório’s illness was due to “overwork, sleep deprivation and exhaustion”, but the illness is “very, very unlikely” to recur.

The imminent return of its CEO, plus the impending sale of 632 branches, marks a double boost for the UK’s biggest mortgage lender.

The Co-op beat competition from new banking venture NBNK to be named preferred bidder for the parcel of branches dubbed Project Verde. Lloyds hopes to agree details with the Co-op by the end of March next year but did not put a price on the deal.

Co-op’s Bradford-born chief executive Peter Marks said enlarging the mutual would create a “real challenger” to big high street banks. Trade union Accord also welcomed the deal, and said it lifts a cloud of uncertainty hanging over staff.

The deal was also hailed by the Building Societies Association, which it said would mean a greater number of bank branches “more interested in customer service than shareholder return”. The mutual sector was dealt a blow earlier this year when the Government decided against re-mutualising Northern Rock, instead selling the nationalised bank to Sir Richard Branson’s Virgin Money.

Lloyds said the “execution risk” in selling the branches to the Co-op was lower than a sale to NBNK. The bank is still keeping the IPO option open for Verde, and said it could float the branches if the Co-op deal falls through.

“We think a combination of these branches and our own would significantly strengthen our position as a real challenger in relationship banking in the UK,” said Mr Marks.

“We have been working to build upon our strong foundations in banking to ensure customers have a real alternative on the high street. We are a people’s bank – mutually owned, with profits shared between members and also used to invest for the long term.”

Manchester-based Co-op currently has 342 branches and a current account market share of just over two per cent following its takeover of Britannia Building Society in 2009. The chairman of The Co-operative Banking Group, Paul Flowers, also hails from Bradford.

Merging with Verde will give the Co-op just under 1,000 branches and close to a seven per cent market share of current accounts – above the six per cent threshold the Independent Commission on Banking wants from a “strong challenger”.

Verde comes with about 5.5 million customers and around £64bn of assets. It includes almost 40 Cheltenham & Gloucester and TSB branches in Yorkshire.

“The BSA welcomes this expansion of the mutual sector in the banking market,” said BSA director general Adrian Coles. “Quoted banks often put the interests of shareholders above those of customers.

“All of our research shows that mutuals offer a better customer service; this change will markedly increase the number of branches in the high street that are more interested in customer service than shareholder return.”

Lloyds’ finance director Tim Tookey, who has covered for Mr Horta-Osório since he went off sick at the start of November, said choosing between the Co-op and NBNK was a “close decision”. “The board felt that the execution risk associated with an existing player to be less – although significant,” he said.

Under European rules on taking state aid Lloyds must sell the branches by the end of 2013.

Consumer group Which? said the Co-op can teach rivals a lesson in customer service.

“If people are to get a better deal from their banks we need greater competition, which means an effective challenger on the high street,” said Which? chief executive Peter Vicary-Smith.

“People tell us they like the Co-operative Bank and we think they can teach the other banks a lesson in good customer service.”

But he called for the scale of Lloyds’ asset sale to be increased.

“Even after the branch sale, Lloyds will still be left with a dominant position in major retail banking markets and is likely to use its market power to increase prices for consumers,” he said. “If Lloyds will not agree to enhance the size of its divestment, then an early reference to the Competition Commission may be the only way of securing further improvements.”

Mr Horta-Osório, who has embarked on a restructuring which involves axing 15,000 staff and shrinking Lloyds’ overseas operations, will not be supported by a chief operating officer, Sir Win said.

“He’s got a strong team but ultimately it’s going to be quite important that this strong team is carrying some of the load, rather than it all on António’s shoulders,” he said.

Analysts said it could take some time before Mr Horta-Osório’s regains investors’ full confidence.

“Only time will tell, but it does not necessarily draw a line under the issue, and the new responsibilities of other members of his management carry the risk of undermining him,” said Shore Capital analyst Gary Greenwood.

NBNK was only formed in 2010 as a vehicle to acquire UK banking assets, and said it will consult investors.

There has been speculation that it could shift its attention towards Yorkshire and Clydesdale banks, owned by National Australia Bank.

The path to being a major player

The Co-operative Banking Group employs around 11,000 staff.

It forms the financial services arm of The Co-operative Group, the Manchester-based mutual conglomerate which employs about 106,000 staff.

The business traces its roots back to 1867 when an insurance co-operative was formed. The Co-operative Bank was established in 1971 and three years later became the first UK bank to offer free banking to customers in credit.

Initially called Co-operative Financial Services, it was formed in 2002 when The Co‑operative Bank, Co‑operative Insurance and smile internet bank were brought together.

The group stepped up its growth in 2009 when it acquired Britannia Building Society, taking over the UK’s second-largest building society. The deal gave it another 245 branches.

This year the mutual rebranded its finance arm as The Co-operative Banking Group. It now has 342 branches and a market share in current accounts of more than two per cent.

The group is also trialling bank branches in its supermarkets, and opened a branch in a supermarket in Horbury, West Yorkshire, earlier this year.