Bank deal may be a step too far

The Co-op group is preferred bidder for Lloyds' branches but the move is proving complex and there are doubts that it is equal to the task

If Lloyds is getting queasy about the sell-off of "Project Verde" what about its preferred bidder? Last week's unscheduled announcement that the EU-mandated sale of 632 branches had been delayed, together with the insistence that a flotation of Verde is being actively pursued, was widely seen as a shot across the bows of the Co-operative, which yesterday published its annual results.

The Co-op's results statement only made a passing reference to Verde alongside the figures which showed that the society's banking operations returned flat profits of £201m.

But Co-operative group chief executive Peter Marks admitted that the transaction was proving "complex" for a number of reasons, not least regulatory. Heads of agreement were due to have been signed yesterday. Lloyds last week said an announcement was now not expected until the second quarter.

Mr Marks yesterday mounted a robust defence of the Co-op's position: "This is a carve-out of a very big business. That means we need to take time.

"I think we've all seen what happens when banks don't take enough time to do things. We are not going to be bullied or harassed by anyone into doing this quickly."

All the same, a decision is still going to have to be made within weeks, not months, and the regulatory complications are not encouraging. Co-op Bank has 345 branches as well as the online bank Smile and is still integrating Britannia building society, two years on from its acquisition. Mr Marks said that the society is "ahead" based on a three-year integration plan.

A deal to buy Verde, however, would be of a different order, more than doubling Co-op Bank's size and potentially creating a genuine challenger to the existing high street players. The new-look Co-op Bank would also account for more than 50 per cent of the Co-operative Group, which could be a problem. The Co-operative board is made up of ordinary individuals elected by regional societies; they include a plasterer, a nurse, a retired publisher. That might not be such a bad thing given the lamentable performance of more conventional non-executive directors in overseeing British companies.

But are they the sort of people who would get through the FSA's "intrusive" screening of directors of banks? The bank has not publicly settled on a chief executive. Or a finance director. Acting boss Barry Tootell, the former finance director, and James Mack, acting finance director, may have to be replaced if the deal goes ahead.

Mr Marks is not best pleased about such questions, which are being raised in City circles. He pointed out that Co-op Bank has its own board, made up of more conventional bank directors. And he added: "We have run a bank for over 100 years. It is also profitable. During the financial crisis a lot of banks governed by professional bankers collapsed and ran to government for a bail-out. Co-op came through the crisis without any crisis. To question our ability is patent nonsense. This is a major deal and it would be a major step-up for us.

"Therefore the Financial Services Authority are quite rightly scrutinising it closely. If we can't satisfy the FSA then I don't want to do this deal. So we are taking our time and doing a very thorough job."

Financially, the Co-op's banking arm is in reasonable health. The company has an enviable loan-to-deposit ratio of 94 per cent, meaning for every £1 in deposits taken in the bank lent out 94p. So, in theory, no requirement for any wholesale funding. That is an improvement on last year's 103 per cent. Its tier one capital ratio of 9.6 per cent is a shade lower than the big high street banks, all of which have more than 10 per cent.

What the bank does not have is the ability to tap the equity markets for cash if funding gets tight although Mr Marks says Co-op is closely involved in discussions with mutuals across Europe about the creation of a new funding vehicle that could rectify the situation.

But he refused to comment on how the purchase of the Lloyds branches might be paid for. Using debt could prove controversial. Mr Marks insists Co-op remains "well within our lending covenants" and is proud of the fact it was able to secure £2bn to fund the acquisition of Somerfield, the grocer, and refinance the group in the middle of 2008 with the financial crisis in full swing. But with £1.4bn of debt on its books, having to take more on might concern the FSA.

The EU deadline to get this done is the end of 2013. Beating it could prove sticky. Royal Bank of Scotland's more conventional sale of just over 300 branches to a more conventional bank (Santander) is a year behind schedule.

Analysts are beginning to bet on that flotation. Nic Clarke, at Charles Stanley, said: "I think the FSA is worried not only about the depth of management experience at the Co-op but also whether the Co-op will have the systems to cope with the transfer and running of the additional branches and customers. I don't think it is a big negative for Lloyds as it has other options (IPO etc)."

Meanwhile, NBNK, the Aim-listed vehicle created to run a new simple bank by former Lloyds chairman Lord Levene, is watching closely. It has a board in place, and equity. But Lloyds made Co-op the preferred bidder claiming it posed less "execution risk" as an established operator. NBNK could surely match its price. Its problem might be Lloyds' pride.

Co-op blames economy and computers for dip

The chief executive of the Co-operative Group insisted its food business has turned a corner after its profits tumbled last year.

Alongside unveiling its full-year results, Peter Marks said its grocery operation had built up "around two weeks" of fuel stocks on fears over the tanker-driver's strike. He blamed "arguably the worst economic downturn in living memory" and an updating of its IT systems for a 20 per cent fall in grocery operating profits to £309.4m for the year to 31 December. The changes to supply chain systems led to lower product availability in its food shops in the first half.

Mr Marks described 2011 as a "challenging" one for the UK's fifth biggest grocer, which has 2,801 shops, following its acquisition of Somerfield's 600 shops in 2009.

Mr Marks said: "It is the first time in my long career that I have seen food volumes fall – people are having to spend less on food."

Its grocery unit suffered a 2.1 per cent fall in like-for-like sales over the year, reflecting a 3.6 per cent fall in the first half and a 0.4 per cent dip over the final six months.

Its full-year sales were lower than Sainsbury's, Morrisons, Asda and even Tesco, which has suffered a fall in UK underlying sales recently. But Mr Marks said it had been a "game of two halves", citing "a massive... and continued improvement" after it addressed its availability issues in the first half.

Overall, the Co-operative Group posted a fall of 5.8 per cent to £373m in pre-tax profits, on revenues up 1 per cent to £13.3bn.

While its banking division's profits slipped by 0.5 per cent to £200.9m, the star performer was its portfolio of specialist businesses. This division's profits jumped by 10.4 per cent to £99.4m, driven by strong results at its funeral care and legal services operations.

The Co-op reduced its dividend per point earned by members to 1.75p from 2p.

James Thompson

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Sport
football This was Kane’s night, even if he played just a small part of it
Travel
travel Dreamland Margate, Britain’s oldest amusement park, is set to reopen
News
news
News
Founders James Brown and Tim Southwell with a mock-up of the first ever ‘Loaded’ magazine in 1994
media
News
Threlfall says: 'I am a guardian of the reality keys. I think I drive directors nuts'
people
Voices
voices The group has just unveiled a billion dollar plan to help nurse the British countryside back to health
News
The Westgate, a gay pub in the centre of Gloucester which played host to drag queens, has closed
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss