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Co-Op Bank Says Lloyds Talks Continue as Impairments Triple

March 21 (Bloomberg) -- Co-Operative Bank Plc, a customer-owned British lender, said it still intends to buy branches from Lloyds Banking Group Plc even as it reported a loss on surging loan impairments and weaker capital levels.

Co-Op Bank will “continue to work” with Lloyds on completing the 750 million-pound ($1.1 billion) acquisition of 632 branches, known as Verde, that was announced in July, the Manchester, England-based lender said today in a statement. It reported a loss of 509.1 million pounds for 2012 compared with a profit of 48 million pounds in the previous year.

The departure last month of Co-Op Bank Chief Financial Officer James Mack sparked speculation that the Lloyds deal, which would more than double the institution’s branch network, was foundering on concern the cooperative lacked the necessary expertise and financial strength. Lloyds said this month that it was also considering an initial public offering for Verde.

“It hasn’t happened, and the reason it hasn’t happened is we are trying to conclude this transaction in very difficult economic times,” Peter Marks, chief executive officer of the lender’s parent entity, Co-Operative Group Ltd., said on a conference call today. “What remains the same is the strategic intent. There will come a time when we say enough is enough, but we aren’t there yet.”

Insurance Sale

Marks is retiring in May after six years as CEO and 45 years working at Co-Op. In August, he said he was “confident” the firm would buy Verde within “a few months.”

The bank’s core Tier 1 capital ratio, a measure of financial strength, fell to 8.8 percent last year from 9.6 percent. Its plans to buy Verde cost 38.1 million pounds in 2012.

“The absolute capital position appears weak to us and, alongside weak profitability, will no doubt raise questions as to the ability of the Co-Op to complete an acquisition of project Verde,” Gary Greenwood, an analyst at Shore Capital Ltd. in Liverpool, England, wrote in a note to clients today.

Co-Op Group, whose other main asset is a grocery chain, also said today that it will sell its general insurance unit to bolster the balance sheet of its financial arm. Marks said the sale was intended to “simplify the business” rather than help fund the Lloyds purchase.

The CEO said it’s too early to put a value on the general insurance business or whether potential buyers have expressed interest. Royal London Mutual Insurance Society Ltd. agreed to buy Co-Op’s life and insurance asset-management businesses yesterday for about 219 million pounds.

Impairments Triple

The Lloyds deal has dragged on as regulators pressed Co-Op to appoint a full-time chief for its lending unit. Shares of Lloyds, which is selling the branches as a condition of its state bailout during the financial crisis, slipped 1.1 percent to 49 pence in London. Lloyds has a November deadline to sell the branches to satisfy European regulators.

Co-Op Bank’s impairments more than tripled to 474.1 million pounds. It also set aside 149.7 million pounds to compensate customers who were wrongly sold insurance.

British lenders including Co-Op, Lloyds and Barclays Plc have been compensating clients sold coverage on loans, known as payment-protection insurance or PPI, unnecessarily or without their knowledge. Britain’s four biggest lenders have set aside almost 11 billion pounds to cover the claims.

Co-Op Bank said the higher impairments were due to a “prolonged poor economic outlook” for provisioning estimates, as well as the performance of some loans in its so-called non-core assets, which it doesn’t intend to renew.

“We were taking a very pessimistic view of the economy, and therefore, prudently, it’s right to take these writedowns in anticipation,” Marks said.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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