The deal will see more than 23,000 residential mortgage customers transfer to Lloyds-owned business Halifax in a move cementing the bank’s position as Britain’s biggest lender.
The sale of the portfolio, which has a lending balance of around £3.7 billion, is expected to be completed by the end of March next year.
It comes after Tesco Bank said in May it was stopping new mortgage lending and put the business up for sale amid challenging market conditions.
Gerry Mallon, Tesco Bank chief executive, said: “Our focus is on how we best serve Tesco customers and align our resources effectively to their needs, while ensuring that our offer remains sustainable in the long term.
“As a result, we made the decision to move away from our mortgage offering.
“Our priority throughout has been to complete a commercially acceptable transaction with a purchaser who will continue to serve our customers well.”
In a statement, Lloyds Banking Group said: “As part of the transaction, we welcome over 23,000 mortgage customers who will be transitioning from Tesco Bank. Halifax has a proven track record in serving and supporting mortgage borrowers across the UK.
“The transaction is consistent with group strategy and value accretive to shareholders.
“As previously indicated, the group’s strong free capital build gives us flexibility to consider inorganic growth opportunities in selected target areas where we see value for shareholders.
“The transaction is in line with this approach and demonstrates the group’s strong commitment to the strategically core prime mortgage market.”
Lloyds said the acquired portfolio will generate good returns to the group in excess of current organic market opportunities, while delivering open mortgage book growth within the group’s low risk strategy and providing additional flexibility in participation choices in the mortgage market.
The statement added: “Following this transaction, we now expect the group’s open mortgage book assets at the year end to be ahead of the year end 2018 balance.
“The purchase price of £3.8 billion represents a 2.5 per cent premium on gross book value. It will be funded using existing internal resources with minimal impact on capital (mid to high single digits basis points at year end 2019). “Under the ownership of Tesco Bank the portfolio generated customer income of c. £81 million and a pre-tax profit of c. £9 million in the year to February 28 2019.”
“The beneficial ownership of the portfolio is expected to transfer at the end of September 2019, with transfer of legal title anticipated by the end of March 2020. We will work closely together with Tesco Bank to ensure a smooth transition to the group for all customers.”
Halifax is a division of Bank of Scotland plc which is a wholly owned subsidiary of Lloyds Banking Group plc.