Lloyds has been forced under European competition rules to sell off 632 of its branches, dubbed Project Verde, and announced earlier this week. The Co-operative Group was the preferred bidder.

The two companies will now enter into exclusive talks.

If a deal is completed, the Co-op, which currently has 342 branches, would become Britain’s seventh-biggest bank with over 1,000 branches.

Peter Marks, group chief executive of The Co-operative Group, said: “We are a people’s bank-mutually owned, with profits sharaed between members and also used to invest for the long-term. Our interest in Lloyds Banking Group’s branch assets need to be seen in this context.

Response was positive with organisations favouring the preference of a mutual.“We are, however, pleased to have been granted preferred bidder status and look forward to working with Lloyds to try to reach this agreement.”

Adrian Coles, director general of the Building Socities Association, said: “The BSA welcomes this expansion of the mutual sector in the banking market, all of our research shows that mutuals offer a better customer service; this change will markedly increase the number of branches in the High St that are more interested in customer service than shareholder return.”

Peter Vicary-Smith, chief executive of Which?, said: “If people are to get a better deal from their banks we need greater competition, which means an effective challenger on the high street. People tell us they like the Co-operative bank and we think they can teach other banks a lesson in good customer service.”

The deal is expected to be completed by November 2013.