START-up bank NBNK and mutually owned Co-operative Group have been shortlisted as prospective buyers of a 632 branch portfolio being sold by Lloyds Banking Group, although a stock market listing also remains a strong possibility.

It is understood that Sun Capital, the vehicle of entrepreneur Hugh Osmond, which was also in the running, lost out because its bid was regarded as less competitive than that of the others when the second-round offers were submitted earlier this month.

The so-called Project Verde portfolio includes 185 Lloyds TSB Scotland branches, the Edinburgh-based Intelligent Finance online bank and the TSB brand and would offer a 4.6% share of the UK current account market.

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Lloyds’s board, which has appointed former Santander executive Antonio Lorenzo to oversee the sale, is still expected to decide on a preferred bidder or a flotation at its December meeting, despite the turmoil at the bank.

Tim Tookey, appointed interim group chief executive after Antonio Horta-Osorio was forced to take time off due to fatigue, said: “We are very pleased with the level of interest and detail of the offers that have been made.

“We will now move quickly in parallel talks with each bidder.”

Lloyds, which owns Bank of Scotland, continues to work on an alternative plan to float the business within the next few years which would give it the potential to earn a higher price if market conditions pick up.

Bank share prices have plunged in the past year, thereby reducing the price Lloyds can hope to command for the business which it is being forced to sell by European competition regulators to compensate for it having been bailed out by the British Government during the credit crisis.

In the meantime it is negotiating with bidders over the details of their offers. The bank has already indicated it will be flexible on the mortgage book included to reduce the funding gap in the business.

An NBNK spokesman said: “If our bid is successful NBNK is going to make a significant contribution to the reform of banking in the UK. It would be a brand-new competitor bank.

“The focus would be on high-quality service and the service that the public wants and deserves and frankly is not getting.”

Although the portfolio includes the TSB brand, it is understood that NBNK, which has prominent Scottish politicians Lord John McFall and Lord Michael Forsyth on its board, would launch a new brand.

The Co-operative is understood to be particularly keen to acquire the Lloyds TSB Scotland portfolio because even after its 2009 purchase of the Britannia building society it only has a handful of branches north of the border.

A successful bid by the Co-op, which has just under 2% of the current account market, would help the Government meet the Independent Commission on Banking’s demand for the creation of a competitor bank with a 6% share of the current account market.