Cascade Commentary

The Co-operative Bank can trace its roots to 1872. Today it provides high street and internet banking, current accounts, mortgages, savings accounts, credit cards and loans. In June 2013, the Co-operative Bank revealed a £1.5bn shortage of capital attributed to many factors including the 2009 acquisition of Britannia Building Society. This led to a US hedge fund rescue that reduced the equity stake of the Co-operative group to just 20%. 

Since then, the Co-operative Bank Board has worked hard to improve financial results cutting costs by more than one fifth, eradicating many unwanted loans following the Britannia Building Society acquisition while investing in the bank’s technology infrastructure to improve its systems. The number of current account holders with the Bank has increased from 637,000 in 2012 to 650,000 in 2016, in spite of the number of branches decreasing from 330 to 100 and the workforce being reduced by half to 4,000 people. 

Despite these efforts, the Co-op Bank needs more capital to meet regulatory requirements over the coming years and yet is expected to report its fifth loss in a row when the 2015/16 annual results are released. In response, the Co-op Bank was put up for sale on February 13th in efforts to “build capital”. The Bank is inviting offers for all of its issued ordinary share capital. Many are suggesting this is unlikely but TSB or Santander UK are being tabled as potential acquirers that could swallow the lender in whole. There remains a risk for the Bank to be sold piecemeal to smaller challenger banks and rivals. Should no solution be sought then the Bank of England may need to step in, although they would likely be reluctant to do so. 

Commentary

Banks and building societies continue to face a challenging environment. The decision to leave the EU in June 2016 by the UK severely impacted the value of the pound while weakening economic forecasts. In response, the Bank of England reduced the base rate further in August 2016 to 0.25% that reduced returns for savers but also impacted the profitability of bank lending with lending rates remaining at a historically low level. 

The Co-op Bank in particular has faced one disaster after another from the 2013 collapse of its proposed TSB deal to the Paul Flowers scandal. Nevertheless many of the Bank’s customers have remained loyal with 85% citing the Bank’s ethical policy as the main root of their support. However given the further announcements this week, many will likely look to keep their savings to the depositor protection limit of £85,000 per person which may cause further pressures. 

We will continue to monitor how this unfolds and keep you abreast of significant changes. The savings rates across the Co-op Banking Licence have not been competitive for some time (including Co-op Bank, Britannia BS and Smile). Coupled with the above, many may wish to look to switch bank. Do let us know if we can be of assistance.