LONDON (Dow Jones)--Lloyds Banking Group PLC on Wednesday made two critical decisions for the future of the bank, announcing the return Jan. 9 of its Chief Executive Antonio Horta-Osorio and disclosing that The Co-operative Group has been chosen as preferred bidder for a 632-branch network being sold by the bank.

The 41%-government-owned bank had been in some disarray following Horta-Osorio's sudden departure in November due to exhaustion. The bank had always said it expected Horta-Osorio to return to his post in the New Year, but the continuing uncertainty over the company's future management had helped send shares to record lows.

Known in the business as a micro-manager, Horta-Osorio launched an ambitious overhaul of the bank when he took up his post in March this year. He expedited the sale of the bank's 632-branch network as part of a wide-ranging asset disposal program and instituted a broad costs-savings strategy.

On his return, and at his suggestion, Horta-Osorio will have his workload lightened by the rest of management who will have more power. This will prevent any recurrence of his exhaustion, Win Bischoff, Lloyds chairman, said in a conference call.

"We believe he just overdid it and was exhausted - it was not stress," he said.

Lloyds also Wednesday announced that it had chosen a preferred bidder for a chunk of its retail network, which it is selling as part of a broad disposal program to shed state aid, stabilize profits and meet tough new regulatory capital requirements. Lloyds will remain a significant player in the market with a network of some 2,286 branches across the U.K. after the sale.

Both bidders, bank acquisition vehicle NBNK Investments PLC and The Co-operative Group, have both submitted offers valuing the business at around GBP1.5 billion but with very different structures.

The bank said that both bids had been of high quality but that it came down to "execution risk."

"It was a difficult decision because of the quality of both bids," interim CEO Tim Tookey told the conference call. "If I had to put it down to one thing, it was the relative execution risk [of the deal eventually being completed]. They are very different entities and the Co-op is an existing player--it is already a bank."

Analysts and industry experts have expressed concerns over the ability of the Co-op to absorb a large retail network while it has yet to complete the integration of the Britannia Building Society that it bought in 2009. However, a spokesman for the bank told Dow Jones Newswires that the integration of Britannia was on track and ahead of budget in terms of its annualized costs savings.

The deal, if successful, will transform the Co-op, tripling its size and giving it a presence in Scotland and the suburbs of many U.K. cities where it doesn't yet operate. It is understood that any job losses will be limited to the margins.

"We have a clear strategy for driving The Co-operative Group forwards. As part of that, we have been working to build upon our strong foundations in banking to ensure customers have a real alternative on the high street," said Peter Marks, Group chief executive of The Co-operative Group.

"We think a combination of these branches and our own would significantly strengthen our position as a real challenger in relationship banking in the U.K.," he added.

Both Lloyds and the Co-op stressed that further due diligence needed to be done before a deal was signed. Tookey said the bank would give a further update by the end of the first quarter 2012. He also said that the bank was keeping the IPO option alive.

JPMorgan Chase and Citigroup are running the auction process for Lloyds. BarCap and Credit Suisse Group AG are advising the Co-op.

The bank has until the end of 2013 to complete a sale of the business to comply with the EU Commission rules.

NBNK expressed its disappointment at the outcome and that the U.K. had lost an opportunity to have a new player in the high street. "The company regrets that it was not given the opportunity to create a break with the past, delivering to the high street a well-capitalized, new challenger bank and brand devoted to providing the level of service that U.K. banking customers deserve," NBNK said.

NBNK was created specifically to acquire banking assets and introduce a new competitor in the U.K. market but has now lost out in two auctions. It failed to secure nationalized lender Northern Rock, which was bought by Virgin Money last month.

The much-larger Lloyds' retail network had always been a priority for NBNK, but without Northern Rock it was always going to be more difficult for NBNK to secure the 6% market share of current personal accounts thought necessary to be an effective competitive challenge to the big banks.

The package being sold by Lloyds makes up 4.6% of the U.K. market and "is on the borderline of sub-scale banks that have failed to grow significantly in the past," the Independent Commission on Banking said in a September report on reforms in the banking sector.

The ICB, which publishes its final report Monday, said that an entity with 6% market share would "ensure the best possible chance of becoming a strong, effective challenger."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.