THE City added about £1.2bn to Lloyds Banking Group's stock market worth yesterday, as revelations that the institution was taking serious steps towards a flotation of its up-for-sale portfolio of 632 branches helped fuel a 5.3% surge in its share price.

This portfolio of branches, for which Lloyds has been undertaking an auction which some industry experts doubt will deliver a sale at an acceptable price, includes the 185 Lloyds TSB Scotland outlets and the Edinburgh-based Intelligent Finance operations.

News that Lloyds Banking Group has been speaking with UK listing authorities about the alternative of floating the up-for-sale assets separately on the stock market appeared to help ensure it was the star yesterday in the sector. Its shares were also supported by positive comments from City banking analysts.

UK banks were generally in positive form yesterday, with fellow state-backed Royal Bank of Scotland enjoying a 2.2% or 0.53p rise in its share price to 24.96p.

One banking analyst yesterday highlighted his belief that leaks from a weekend summit of European Union leaders which came close to agreement on bank recapitalisation had signalled UK banks had no need to “raise a penny”, unlike some of their mainland European counterparts.

Ian Gordon, banking analyst at stockbroker Evolution Securities, said: “The white smoke emerging from this weekend’s pantomime in Brussels suggests a European bank recap towards the bottom end of expectations – €108 billion-ish (£94bn) – albeit the actual amount issued may yet be ‘mitigated’ further. The, we believe obvious, point that UK banks won’t need to raise a penny is seemingly confirmed by the steady drip of Brussels leaks.

“Although UK banks, notably Barclays and RBS, have been serial outperformers of late, we believe this should continue as investors reject...research circulated in recent weeks suggesting that UK banks may need to raise capital, and recognise that UK banks substantially share Nordic banks’ defensive qualities against a European sector that is preparing to drown in new equity issuance.”

Lloyds Banking Group shares, which have plummeted in recent months, finished 5.3% or 1.73p higher at 34.6p. Oriel Securities said the shares were undervalued, highlighting a near-50% fall in 2011 compared with a 24% drop for the wider banking sector.

Serious doubts have been raised by banking industry experts about whether Lloyds Banking Group can, through its ongoing auction, conclude a successful trade sale of the portfolio of branches and associated assets which it has been ordered to sell by the European Union by November 2013. Clydesdale Bank owner National Australia Bank, which was a heavyweight contender in the auction, has made it plain it is no longer interested in the up-for-sale branches.

NBNK, set up by former Lloyd’s of London insurance market chairman Lord Levene, is believed to be the only suitor to have submitted a formal second-round bid, although private equity outfit Sun Capital and Cooperative Financial Services are said to remain interested.

Amid doubts over the outcome of the auction process, news of concrete steps by Lloyds Banking Group to pursue the alternative strategy of flotation appeared to be welcomed by the City.

Such an option would, it is believed, have to involve a full-scale flotation in which shares in the up-for-sale assets were offered to institutional and possibly also private investors, as opposed to a spin-off whereby existing shareholders of Lloyds Banking Group were given stock in a separately-listed company comprising the assets to be divested. One industry source noted in this context that the European Union required complete separation of the up-for-sale portfolio from Lloyds Banking Group, which is having to divest this part of its business in return for the billions of pounds of UK state aid it received. The UK taxpayer owns more than 40% of Lloyds.

The business to be divested will comprise the TSB brand, the branches, savings accounts and branch-based mortgages of Cheltenham & Gloucester, the branches and branch-based customers of Lloyds TSB Scotland and a related banking licence, additional Lloyds TSB branches in England and Wales with branch-based customers, and the Intelligent Finance brand and this operation’s customers and accounts.

Analysts have cited a funding gap between loans and deposits at the up-for-sale operations, running into tens of billions of pounds, as a huge barrier to a trade sale. Lloyds Banking Group is believed, following representations from suitors, to have offered to sell a portfolio with fewer mortgages to reduce the scale of this funding gap.

A Lloyds Banking Group spokeswoman told The Herald yesterday it was “working very hard” to ensure, “whatever route we take we are able to meet” the November 2013 deadline.

Noting the operations to be sold would comprise the seventh-largest bank in the UK, with more than 40% of the population living within two miles of a branch, she added: “This is quite exciting for the high street.”

Emphasising Lloyds was looking at both flotation and trade sale, she added: “Yes, we are progressing both routes, It has always been dual track...It shouldn’t come as a surprise that we are progressing and talking to listing authorities.”