Lloyds knew of Co-op’s capital black hole

Lloyds chief executive Antonio Horta-Osorio

Lloyds Banking Group has revealed it began to doubt the deal to sell 632 branches to the Co-op would go through six months ago when it uncovered a hole in the Co-op Bank’s balance sheet.

The Co-op bid to buy the Lloyds branches collapsed in April, triggering a downgrade of the Co-op Bank’s credit rating by Moody’s. The Co-op Bank announced a rescue plan yesterday which would see its parent and bondholders contribute to plugging a £1.5bn capital shortfall.

Lloyds chief executive Antonio Horta-Osorio and chairman Sir Winfried Bischoff appeared before the Treasury select committee this morning to answer questions about why the branch sale, known as Project Verde, collapsed, and whether there was any Government involvement in choosing the Co-op to take on the branches over rival bidder NBNK.

Bischoff told MPs the due diligence into Co-op was somewhat limited as the Co-op Bank was not a publicly listed company, which meant Lloyds had to rely on information provided by the Co-op.

He said the Lloyds board became concerned there was a shortfall in Co-op’s capital in December.

Horta-Osorio explained doubts began to emerge when Co-op submitted a revised business plan for the Co-op Bank and the Lloyds branches.

He said: “In the analysis of our teams and our advisers, it was clear to us from that information indirectly, that there was a shortfall of capital, which was when we first had concerns about their capability of closing the deal by March 2013.

“This was not given to us in the form of a warning, we were not approached by the Co-op Bank or the Co-op Group. We enquired to the Co-op formally about it, they did not come to us and say they had a problem. The answer from the Co-op was ’we are handling this, we have several options and we are revising the plans and the options we have together with the regulator in order to address this situation’.”

Lloyds told MPs they were “sceptical” and were not “totally reassured” by Co-op, and so continued to make plans to float the branches as a separate business under the TSB brand.

Treasury select committee chairman Andrew Tyrie said: “But a good deal of money could have been saved, and a good deal of ink need not have been spilt if they had been more open with you from the start. It sounds to me that you are saying they engaged in negotiations with you knowing their balance sheet was weaker than it appeared to be at the start of the negotiations.”

Lloyds rejected the suggestion there was any Government involvement in choosing the Co-op bid over NBNK’s, saying “there was no political pressure”.

The bank said Co-op Bank emerged as the winning bid based on the price they offered and the fact they had a brand and infrastructure already in place.

Horta-Osorio said he “seriously contested” the idea that the NBNK bid had been discounted at an early stage, as NBNK had five bid attempts to secure the Lloyds branches.

He revealed Lloyds has so far spent £1bn integrating its systems with those of HBOS, which it took over during the financial crisis in 2008. It will spend another £600m splitting out its branches ahead of a stock market flotation. If the Co-op deal had gone ahead, it would have cost Lloyds a total of £1.3bn.

Lloyds is being forced to dispose of the branches by the European Commission as part of the bank receiving state aid. The branches will rebrand as TSB Bank in the summer and will operate as a separate business with Lloyds ahead of an IPO.