PART-nationalised Lloyds Banking Group is to receive £350 million upfront from the Co-operative Group for a 632-strong package of branches including Lloyds TSB Scotland, and another £400m in instalments up to 2027, if the business meets performance conditions.
Lloyds was told to sell the so-called Project Verde portfolio by European competition officials as a condition of its £21 billion taxpayer bailout following its rescue acquisition of Halifax Bank of Scotland in 2008.
When Lloyds first entered exclusive talks with Co-operative before Christmas, it had been expected to net £1.5bn from the deal.
Asked if the Co-operative took advantage of a recent slump in bank valuations to secure a cut-price deal, chief executive Peter Marks said: "We think we are paying a fair price for this business. We negotiated hard. That is what I am here to do. Both parties are happy with the deal."
A source suggested start-up bank NBNK, which lost out to Co-operative, had offered £800m up front for the portfolio and more generous ongoing payments.
Analysts estimated Lloyds will make a £750m loss on disposal.
The agreement is non-binding and still has to be signed off by regulators.
Co-operative plans to fund the deal by issuing £350m of debt, which will be underwritten by Lloyds.
Lloyds chief executive Antonio Horta-Osorio said: "In agreeing to move ahead with the Co-operative we provide greater certainty for our customers and for our shareholders."
Co-operative currently has just one bank branch and three outlets of its Britannia business in Scotland.
It is picking up 185 Lloyds TSB Scotland branches plus four that operate as Cheltenham & Gloucester.
This will give it the third biggest branch network north of the Border, behind Bank of Scotland and Royal Bank of Scotland but ahead of Clydesdale.
UK-wide, it will have 1000 branches, increasing its share of the network from 4% to 10%.
With 4.8 million accounts across the UK, the Scottish arm is likely to have some 1.4 million customers.
Asked if he was putting the mutually-owned Co-operative at risk, Mr Marks told The Herald: "Not at all. It is quite the reverse.
"Because we came through the financial crisis in great shape and we are still in great shape we want to take advantage of that.
"What we are going to create here is a real challenger bank to the big five (Lloyds, RBS, HSBC, Barclays and Santander)."
The deal will see around 2000 Scottish branch workers move to Co-operative.
The mutual could also take hundreds of Lloyds employees in Livingston, West Lothian, who carry out customer service and back-office work for the Verde business.
The Co-operative is not buying Edinburgh-based Intelligent Finance, the telephone and internet banking business that was part of the Verde business.
This means the business being transferred will have a smaller-than-expected balance sheet of around £24bn and there will be no funding gap.
Lloyds said it would review its ownership of Intelligent Finance.
The combined Co-operative Bank will be run by Paul Pester, chief executive of Lloyds's Verde arm.
It will be rebranded TSB from summer 2013 and the deal will be completed by November of that year.
Co-operative said it hadn't decided whether it will later rebrand its whole estate as Co-operative.
The combined banking business will eventually use a version of Lloyds's information technology platform, which will be managed by Lloyds.
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