LLOYDS Bank plans to float a 25 per cent stake in its TSB business on the stock market, with small investors being offered free shares in the bank.

Investors will get one free share for every 20 shares they buy up to the value of £2,000 and hold for a period of one year after the flotation.

The share sale is set to take place next month.

TSB is being floated to meet EU rules regarding state aid.

Lloyds was bailed out by the UK taxpayer in 2008.

TSB has 631 branches and 4.5 million retail customers, making it the seventh largest retail bank in the UK.

The Co-operative Bank was set to buy TSB, but the planned deal collapsed after it emerged that the Co-op had a £1.5bn hole in its finances.

After government and opposition demands there should be more banks on the high street, TSB will join Metro Bank and Virgin Money as players in the retail market.

Royal Bank of Scotland’s Williams and Glyn branch network with 1.7 million customers is also being prepared for European Commissionenforced independence.

TSB will need to show that this competition means something for customers.

Chasing market share with ‘innovative’ products often leads to problems as banks have found with payment protection insurance. ‘Packaged accounts’ – which come complete with insurance products and special offers – could be next.

There is something of a contradiction here. The government wants boring banks.

It also wants a competitive market. The two tend to pull in opposite directions.

António Horta-Osório, Lloyds Banking Group chief executive, said: “The decision to proceed with an initial public offering of TSB is an important further step for the group as we act to meet our commitments to the European Commission.

“TSB has a national network of branches, a strong balance sheet and significant economic protection against legacy issues,” he added.

Lloyds must sell its remaining stake in TSB before the end of 2015.

Paul Pester, chief executive of TSB, told investors that TSB had not been affected by banking issues such as the mis-selling of payment protection insurance.

“We have a low-risk, simple and clean balance sheet,” he said.

The bank is opening four to five times as many current accounts under TSB than under Lloyds, he added.