LONDON New British bank venture NBNK NBNK.L and the mutually owned Co-operative Group have been shortlisted by Lloyds (LLOY.L) as prospective buyers of the 630 retail bank branches which it has been told to sell, sources with knowledge of the situation said.
Lloyds said on Wednesday that it had received three formal offers for the assets and had decided to take forward discussions with two bidders, in a process which the part-nationalized British bank has code-named "Project Verde."
Lloyds did not identify who those bidders were, but the sources told Reuters that they were NBNK and Co-op's financial services arm. Sources have also said that the assets could be worth between 1 billion pounds and 1.5 billion pounds ($1.6-$2.35 billion).
Lloyds has been forced to sell the branches by European competition regulators to compensate for it having been bailed out by the British government during the credit crisis.
However, the sale has drawn muted interest because the ongoing market turmoil caused by Europe's sovereign debt crisis has impacted the valuation of the branches, and Lloyds reiterated it could opt to spin off or float the Verde assets.
"The group will also continue to work on an initial public offering as a potential alternative to a direct sale. As previously announced, the group is aiming to identify a preferred option by the end of the year," Lloyds said.
Shares in Lloyds, which is 40-percent owned by the British government following its bailout in 2008, were down 2 percent at 21.93 pence in mid-morning trade. The stock remains well below the 63 pence price at which the British taxpayer acquired its stake in the bank.
Separately, Lloyds also pledged to lend some 12 billion pounds to UK small businesses in 2012.
LLOYDS BRANCH SALE FOLLOWS NORTHERN ROCK DEAL
Britain is keen to return back to the private sector the various banking assets it was forced to bail out in 2008.
Last week, the government said it would sell Northern Rock, the bank which was fully nationalized in 2008, to billionaire Richard Branson's Virgin Money for up to 1 billion pounds - less than the 1.4 billion pumped in to Northern Rock by taxpayers.
Similarly, Lloyds may have to sell its Verde assets for less than the full book value of the assets.
Acquiring the Lloyds retail branches offers both NBNK and Co-Op the chance to create Britain's seventh-biggest bank in one fell swoop.
The Verde assets include 4.6 percent of personal current accounts and 5 percent of the mortgage market, contributing about 500 million pounds of pretax profit in 2008 and income of about 1.4 billion pounds.
The auction comes at a tricky time for Lloyds since its chief executive Antonio Horta-Osorio is on sick leave after suffering a stress-related illness.
Shore Capital analyst Gary Greenwood said that all three options for Lloyds -- a sale to NBNK, a sale to Co-Op or an initial public offering -- posed certain problems.
"I suspect that unless NBNK raise their offer, then an IPO might be more attractive for Lloyds," said Greenwood.
"As for the Co-Op, the question is - can they afford it? They might need to raise capital from their parent group."
The Co-Op has one advantage over NBNK in that it already has an operational presence in the financial services sector.
NBNK was only formed in 2010 as a vehicle to acquire UK banking assets, although it has well-known names on its board, such as former Northern Rock boss Gary Hoffman and former Lloyd's of London insurance chairman Lord Peter Levene.
The sale of the Lloyds branches could represent a first step toward Britain eventually selling off its Lloyds holding.
Britain ended up with 83 percent of Royal Bank of Scotland (RBS.L) and 40 percent of Lloyds after bailing out both banks during the 2008 credit crisis.
($1 = 0.6391 British pounds)
(Reporting by Sudip Kar-Gupta; Editing by Greg Mahlich and Helen Massy-Beresford)