The news will come as a blow to Antonio Horta-Osorio, Lloyds’ new chief
executive, who personally accelerated the disposal process shortly after
taking the reins from Eric Daniels, his predecessor, on March 1.

Of the other potential buyers, Australia’s NAB, tipped ahead of the deadline
to be the frontrunner, reserved its position to make a bid at a later date,
Clive Cowdery’s Resolution expressed interest and the Nationwide building
society sent a letter focused on remutualising the old TSB branches.

Virgin Money is understood to have written a letter to Lloyds asking for more
detail about the sales process. It is thought that Virgin is more interested
in bidding for Northern Rock.

An important factor that prevented some from making a bid was the £20-30bn
funding gap – the product of Verde’s £64bn asset base set against £32bn of
liabilities. Lloyds is believed to have told would-be bidders that this
would fall to approximately £10bn within 18 months as customers repay
mortgages contained in Verde.

Advisory banks Citigroup and JP Morgan had resolved to explain this gap, but
one non-bidder said the wording in Verde’s information memorandum on the
issue was unclear about how this would happen.

It is understood Citigroup and JP Morgan are now exploring plans to demerge
the business as the most viable option given the low level of interest from
buyers.

Although a trade bidder might still be the preferred option, it is believed
both the investment banks and Lloyds are concerned about the lack of
interest in the branches. At one stage it was hoped the assets might fetch a
price of up to £4bn.

Critics point out that any demerger – most likely enacted through a
one-for-one share split which would see taxpayers end up with a 41pc stake
in the separately quoted Verde – would take up to 18 months to put into
operation, as the management team was only assembled in May.

Another option would be to postpone the sale altogether, given the ultimate
deadline for the disposal to go ahead is not until November 2013. A Lloyds
spokesman said: “A dual track process has always been part of how we’ve
presented it to the market. We have received a number of credible bids.”