NBNK Investments PLC (NBNK.LN) is considering a potential last-minute swoop to buy 632 branches off Lloyds Banking Group PLC (LLOY.LN, LYG), as the part state-owned bank struggles to complete a long awaited sale to the Co-operative group, according to a person familiar with the matter.

Last week, Lloyds said it would delay giving an update on the sale of its branches to the Co-op until later in the year, sparking fears that the estimated 1.5-billion-pound ($2.4 billion) deal is on the rocks.

Lloyds has to sell the branches on condition of receiving state aid when it was bailed out by the U.K. government in 2008. But the sale, codenamed Verde, has been dogged by regulatory problems.

NBNK, an investment vehicle created by a cohort of financial heavyweights to make acquisitions in the U.K. domestic banking and wealth-management sector, is waiting in the wings in case the deal with the Co-op fails to materialize, the person familiar with the matter said Sunday. It is unlikely that any deal between NBNK and Lloyds will be completed imminently, this person said. The Sunday Telegraph newspaper reported that NBNK would put in a sweetened offer of GBP1.5 billion on Monday. A Lloyds spokeswoman declined to comment on the report and reiterated that the bank was still in talks with the Co-op which are its preferred bidders.

Lloyds' 632 branches make up around 4.6% of the U.K's lucrative checking-account market. The sale of these branches was heralded by the British government as a way to boost competition in the U.K. banking sector and improve lending conditions. However, the creation of the much-trumpeted "challenger bank" has yet to materialize. The combination of stringent regulation, bleak macroeconomic outlook and the presence of several established banks has dulled interest in the U.K retail banking market, analysts say.

In December, the Co-op, a member-owned groceries-to-banking business, was chosen as preferred bidder for the branches over NBNK. However, the bid by the Co-op has been stalled by the U.K.'s regulator, the Financial Services Authority. In part the FSA raised issues over the experience of the Co-op's board, which count a nurse and a medicinal-plant consultant among its members.

The Co-op is currently exploring options to appease the regulator. These include making the whole group--which comprises a retail and legal and insurance services as well as a bank network--an FSA-regulated entity--a move that would likely involve higher capital requirements across the group. Another possibility would be to ring-fence the bank, which has its own 14-strong board, from the rest of the group. The Co-op is currently looking for a new chief executive for its banking group.

Lloyds' management said last week that it could still conduct an initial public offering for the branches should talks with the Co-op fall apart. Last week, Lloyds said that it was adding extra staff to the branches, sparking rumors that it is now looking to turn them into a stand-alone business. Lloyds, which is 40%-owned by the British government, was ordered by the European Commission to sell the branches by the end of 2013.

Separately, NBNK is also keeping close tabs on the 330 U.K branches owned by National Australia Bank Ltd (NAB.AU), a person familiar with the matter said. During a recent earnings call NAB's management said that all options are open for the U.K business.

   -By Max Colchester, Dow Jones Newswires; 
   +44 207 842 9900; max.colchester@dowjones.com
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