Co-operative Group is to acquire 632 branches from Lloyds Banking Group, subject to FSA approval.

It will will give the Co-op around 1,000 branches representing approximately 10% of the current UK banking network.

This will consist of 4.8 million customers including 3.1 million personal current account customers.

The transaction will include the transfer of the TSB and Cheltenham & Gloucester (C&G) brands.

The Co-operative will initially pay £350 million, and up to an additional £400 million in present value – equivalent to around £800 million on a nominal basis – based on the performance of the Co-operative’s combined banking business from completion up to 2027.

“Today’s agreement is an important step in meeting our obligations under the mandated sale of our branches,” said António Horta-Osório, Lloyds Banking Group chief executive.

“We believe the Co-operative will be a good owner for our business, customers and colleagues, and the combined banking business will be a significant competitor on the high street with nearly 10 per cent of today’s UK branch network.

“In agreeing to move ahead with the Co-operative we provide greater certainty for our customers and for our shareholders.

“In addition to an upfront consideration, we will also get to share in the future financial performance of the combined banking business which will be an effective challenger with a strong customer focus.”

Kevin Mountford, head of banking at MoneySupermarket said: “The decision by Lloyds Banking Group to sell 632 bank branches, which also include Cheltenham & Gloucester branches, to The Co-operative Bank heralds a significant shift in the UK banking sector. The deal will more than double The Co-operative Bank’s branch network to almost 1,000 and will give it an additional five millions customers, taking its market share from 1% to 7% overnight.

“As we have seen over recent weeks following the recent banking turmoil, many smaller banks, including The Co-operative Bank, have benefited from customers switching away from the big banks. Creating a new ‘real’ challenger to the big banks may be the antidote the sector needs, and may encourage a culture of switching which has been lacking over the past few years, especially as The Co-operative Bank is seen as a more trusted brand that many of its rivals.

“The deal is not due to complete until late 2013, and still requires FSA approval, so it will be some time before Lloyds TSB and Cheltenham & Gloucester customers switch over. For most customers, the switch will be straight forward, so they should hold tight and see what is on offer.”