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* NBNK says thinks was political interference in process
* Lloyds says Co-op picked for financial, deal reasons
* Lloyds became aware of Co-op problems in December
* Moody's downgrades Co-op Bank ratings
By Matt Scuffham and Steve Slater
LONDON, June 18 (Reuters) - British bank Lloyds hasdenied being subject to political pressure to sell hundreds ofbranches to the Co-operative Group, rebuttingsuggestions of ministerial interference in the controversialsale.
Lloyds has been forced to sell the 632 branches by Europeanregulators as a cost of its taxpayer rescue in 2008, but itschoice to sell to Co-op Bank has been slammed after a big holeappeared in the mutual's finances, prompting allegations that politicians had encouraged the choice.
"What the board looked at was financial and the ability toexecute (the sale). Those were the only two things we looked at,no political (pressure)," Lloyds Chairman Win Bischoff told acommittee of lawmakers on Tuesday.
The Treasury Select Committee quizzed Lloyds executives ontheir decision, since abandoned, to sell the branches to theCo-op, rather than to a rival start-up bidder NBNK,which said it made a higher offer.
Peter Levene, former chairman of NBNK, said in writtenevidence to the committee there appeared to have been politicalinterference in the bidding process.
Co-op withdrew its offer to buy the branches in April afterit was found to have a capital shortfall, which Britain'sregulator has since pegged at 1.5 billion pounds ($2.4 billion).
Ratings agency Moody's on Tuesday piled more pressure on theCo-op, downgrading its senior debt and deposit ratings. Themutual, which has 4.7 million bank customers, is forcingbondholders to take losses under its rescue plan.
Lloyds picked Co-op as the winner of the auction last Julyand executives said they only realised there was a problem withCo-op's capital strength in December.
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NBNK's Levene said it had offered more money than the Co-opand was the only bidder to meet the timetable set out by Lloydsfor second-round bids, which the bank extended to allow theCo-op to make its offer.
He said he had received "a number of messages indicatingthat there had been significant political involvement leading upto the original decision", as the coalition government hadwanted to promote the interests of mutuals in financialservices.
"I was therefore advised that the decision was based on anindication from senior politicians within the coalition that theCo-op deal was to be the preferred and definitive solution,"Levene said in a submission to the committee.
Lloyds CEO Antonio Horta-Osorio rejected Levene's claimsthat Lloyds preferred the Co-op. "I seriously contest that. Theoffer in the end was not substantially better ... we chose thebest bid," he said.
NBNK was allowed to make five bids and it should have made ahigher offer to succeed, Horta-Osorio said.
Both offers had complex structures. Co-op's bid was worthabout 700 million pounds and NBNK's offer may have been just 630million, Lloyds estimated.
Horta-Osorio estimated it would cost Lloyds about 1.6billion pounds to spin-off and separate the branches.
The Lloyds executives said they discussed the bid processwith government ministers.
"There was no preference expressed to us by governmentministers," Bischoff said. He said after the bank picked theCo-op ministers were pleased with the decision and indicatedthey liked the mutual sector.
Lloyds said it had contacted 42 potential bidders for thebranch network, codenamed Project Verde, which ended withconfirmed bids by Co-op, NBNK and Sun Capital.
NBNK released a document it said it gave Lloyds in January2012 saying there was a "high risk" the Co-op's purchase of thebranches would fall through, citing its stretched capitalposition and execution risk.
