LLOYDS Banking Group discovered Co-operative Bank's capital troubles in December when it examined revised bid proposals for the Verde branches, including Lloyds TSB Scotland, the part-nationalised institution has revealed.
The £700 million deal collapsed in April leaving Lloyds, which also owns Bank of Scotland, to pursue a flotation while Co-operative Group this week set out plans to plug a £1.5 billion capital shortfall at its banking arm, in part by listing it on the stock market.
Lloyds chairman Sir Win Bischoff yesterday denied claims by a failed bidder, the start-up bank NBNK, that there was political pressure to sell to Co-op.
Meanwhile, Lloyds chief executive Antonio Horta-Osorio claimed the 632 Verde branches are now worth double what 39% taxpayer-owned Lloyds was offered by Co-op and NBNK, implying a valuation of between £1bn and £1.5bn.
Mr Horta-Osorio told MPs on the Treasury Committee: "We were surprised in December to see there was a shortfall in capital."
Lloyds staff unearthed the problems when Co-op submitted a revised business plan for its combination with Verde, which has 185 branches in Scotland.
"The Co-operative Group's answer to us was 'we are handling this'," Mr Horta-Osorio said. He added Lloyds gave Co-op time to sort out its capital problems as it worked on separating out Verde.
He added Lloyds was committed to hiving off the branches by autumn 2014 under a European state aid deal and there was a risk that "the EU might do it themselves at any cost".
Mr Horta-Osorio said Lloyds faces a £1.6bn bill for floating Verde which is being badged as TSB. This is around £300m more than if it sold it to Co-op. This follows the £3bn cost of integrating former Edinburgh-based Halifax Bank of Scotland.
NBNK chairman Lord Levene of Portsoken complained of "significant political involvement" ahead of the Co-op bid being given the green light.
The Treasury Committee published a memo submitted by NBNK to Lloyds in January 2012 warning "Co-op's finances look to be overstretched".
Sir Win insisted: "What the board looked at was financial and the ability to execute (the sale). Those were the only two things we looked at, no political (pressure)." The NBNK bid was "credible", he said, and was taken seriously.
"Had NBNK had a higher price, and it had five opportunities to bid, we would have been very happy if they had come out on top."
But it was £70m lower than the Co-operative bid and was not underwritten by investors.
Mr Horta-Osorio said: "It is very easy to guess football results on a Monday.
"With the same hindsight people are now saying we gave too generous a deal to Co-op.
"NBNK's board with the same hindsight should be very sorry they offered 50% (of book value) to get 5% of the UK banking market which is now worth more than double. "
Lloyds revealed it approached 42 potential bidders for Verde.
Meanwhile yesterday, the day after setting out debt swap plans to plug a £1.5bn capital shortfall and a month after being downgraded to "junk", Co-operative had its credit rating lowered further by Moody's Investors Service, leaving its unsecured debt and deposit ratings seven steps below investment grade.
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