Lloyds Banking Group will transfer £4bn worth of mortgages to TSB under a deal struck with the Treasury, with the aim of boosting the new bank’s profits by £200m over four years.
As part of the deal, Lloyds will also provide TSB with an additional £40m to help it become established following the bank’s birfurcation this week.
The cash boost for TSB came following recommendations made by the Office of Fair Trading, which had been asked by the government in June to review the impact the Lloyds and RBS divestments, known as Project Verde and Rainbow respectively, would have on competition.
The OFT recommended for Project Verde, which has taken the form of a re-launched TSB this week, that Lloyds strengthen the new bank’s balance sheet to improve its profitability and enable TSB to grow its market share more rapidly.
The OFT also stated Lloyds should ensure key services, like IT, are being provided by Lloyds as part of the transfer to help TSB compete in the future.
For Project Rainbow, the OFT found that, consistent with the original European Union state aid agreement, RBS’s plan will result in a credible small and medium-sized (SME) bank, especially for businesses with a turnover of between £1m and £25m.
The OFT expects it to have the ability to compete and grow over time and has not recommended any changes to the current divestment plan.
However Vince Cable, secretary of state for business, raised concerns that this latest report did not tackle the significant structural problems that remain with the sector, especially in lending to small businesses. Mr Cable next year a further OFT report will shed more light on this issue.
Mr Cable said: “We must not forget the potential implications of a ‘good bank/bad bank’ split of RBS. Today’s OFT report did not consider these, and work on a possible split is continuing separately.”
On 9 September, Lloyds launched TSB as a new challenger bank and expects the business to float on the London Stock Exchange in 2014.
Paul Pester, chief executive of TSB Bank, said: “I am pleased that the Office of Fair Trading has acknowledged TSB’s potential impact on competition in the UK banking market.
“However, it’s clear they’d like us to reach our potential more quickly, which is why I welcome the measures agreed between Lloyds Banking Group and HMT.
“These represent an enhancement to TSB Bank and will enable us to accelerate our strategy of bringing local banking back to Britain.”