In a statement, Aberdeen said it will buy Lloyds' asset management unit Scottish Widows Investment Partnership for around 550 million pounds ($885 million) in shares.
In return, Lloyds — still around one-third owned by the British government following a bailout — will get a 9.9% stake in Aberdeen. The two will also form a long-term strategic partnership whereby Aberdeen will manage assets on behalf of Lloyds.
Lloyds said it will be a "supportive" shareholder and has committed to maintain its initial shareholding in Aberdeen for at least a year, and a third of it for at least three years.
Aberdeen could make a further 100 million pounds cash payout to Lloyds over five years if certain performance criteria are met. The sale, which is expected to be completed early next year following the necessary regulatory approval, does not include Scottish Widows, Lloyds' life, pensions and investment business.
"We are confident that this transaction will deliver considerable additional value to our expanded client base and this will therefore benefit our shareholders," said Martin Gilbert, Aberdeen's chief executive.
Investors cheered the prospect of another 136 billion pounds worth of funds being added to Aberdeen's current portfolio of around 200 billion pounds. Aberdeen shares were up 14.1% to 487 pence in London.
"After the completion of this acquisition Aberdeen Asset Management will become the largest fund management firm in Europe," said Alastair McCaig, an analyst at IG.
For Lloyds, McCaig said the deal is another step the bank has taken to "reorganize its portfolio of exposure." Shares in Lloyds rose 1.4 percent to 76 pence.
Lloyds had to be bailed out by the British taxpayer at the height of the banking crisis in 2008 but has recently shown signs that it is h! ealing. The government recently sold some of its stake in the bank.