But it soon became clear there was a blackhole in its books.
Addressing a Treasury Select Committee investigating the collapse of the deal, the chairman of Lloyds Banking Group said the Co-op Bank was deemed to be a “highly respected institution” when an agreement in principle over the sale of 632 Lloyds branches was struck last July.
The proposed purchase, dubbed Project Verde, collapsed in April, leading to a crisis at the mutual exacerbated by a ratings downgrade by Moody’s.
Sir Win said there had been “no withholding” of information from the Co-op in July, and that the bank was initially satisfied with its due diligence. However, it emerged in December that the mutual had a shortfall in capital.
Lloyds group chief executive António Horta-Osório told the committee that once Lloyds had identified a shortfall in its due diligence it approached the Co-op, which said it was “handling” the situation. Sir Win added that “the markets still had a positive view on the proposed deal” at the time.
When asked by Conservative MP Mark Garnier whether the “wool had been pulled over your eyes”, Sir Win said: “The FSA told us that neither the Co-op nor [rival bidder] NBNK were free of execution risk, but the Financial Services Authority did not tell us ‘don’t do it’ either.”
The Lloyds board members claimed that no “political pressure” had been placed on the bank to press ahead with the Verde sale to the Co-op.
However both Lord Levene, former chairman of NBNK, the investment firm, and Tory backbencher David Davis have suggested the government put pressure on Lloyds to accept the Co-op bid.
Mr Horta-Osório said: “No preference was expressed to us by the government”. He added, however, that ministers “preferred the mutual model of the Co-op” once the decision had been taken.
According to a statement from the Co-operative Group, “a significant minority equity interest” in the bank to will be opened up to target security holders, and this interest will be listed on the LSE.
A spokesman said: “We have not put a number” on the shares that will be listed, but it is understood to be north of 20 per cent.
Background
NBNK offered £750m for the branches, of which £120m would be set aside for “break-up” costs. The Co-operative offered £350m up-front, in addition to £100m in break-up costs and £250m over time. The Verde branches will now be spun off into a new TSB bank, with set-up costs in the region of £1.6bn. The committee was told that the cost to the taxpayer of the failed Co-op purchase would come to around £300m.
Co-op recapitalisation
The Co-operative Bank announced on Monday it had agreed on a plan to fill a £1.5bn capital shortfall on its balance sheet. As part of the deal, bondholders will be forced to exchange their bonds for a combination of capital instruments and shares in the bank.
Adviser View
Ashley Clark, founder of Staffordshire-based NeedAnAdviser.com, said: “I hope the committee found these answers insulting. £300m has been wasted, and I find it hard to believe that no-one spotted such a black hole last summer.
