Lloyds deal under threat as Co-op faces capital hole: FT

The Co-operative Bank's deal to buy more than 600 branches from Lloyds Banking Group is under threat as the Co-op faces a 1 billion pound capital hole, the Financial Times reported on Tuesday.

The Co-op's capital deficit is the first to emerge from regulators' analysis of balance sheets after the Bank of England's Financial Policy Committee suggested that the shortfall across the sector could be as much as 50 billion pounds ($76 billion).

The Financial Services Authority is expected to outline individual deficits in the coming weeks, the FT said.

A list of options would be presented to the Co-op's board next month, the FT cited one person with knowledge of the Co-op's plans as saying. Three other people, however, told the financial daily that it was highly unlikely that the Lloyds deal would be kept alive.

The FT cited two people close to the matter as saying the bank was hoping to find a partner from continental Europe, possibly a mutually owned organisation like the Co-op, to join the Lloyd's bid.

"We are continuing negotiations with Co-op and are making good progress in creating a stand-alone challenger bank," Lloyds said in an emailed statement.

A spokesman for the Co-op said it remained in talks with Lloyds regarding the purchase of the branches.

The FT also reported that the Co-op - a food-to-funerals conglomerate of which the bank is a part - is planning to sell its non-life insurance business to address the billion pound capital deficit. (http://r.reuters.com/can36t)

In addition to the non-life insurance unit, the Co-op could sell its pharmacies business, while further capital could be released through selling parts of the bank's loan or mortgage book, the FT said on its website.

The Co-op reached an agreement to buy 632 branches from Lloyds Banking Group last July in a deal that would transform its banking operation into a serious rival to Britain's dominant high-street banks.

(Reporting by Abhishek Takle in Bangalore; Editing by Steve Orlofsky)