The Co-operative Bank - Smile Bank

The Co-operative Bank plc is a retail and commercial bank in the United Kingdom, with its headquarters in Balloon Street, Manchester.

The bank markets itself as an ethical bank, and seeks to avoid investing in companies involved in certain elements of the arms trade, fossil fuel extraction, genetic engineering, animal testing and use of sweatshop labour as stated in its ethical policy. The ethical policy was introduced in 1992 and incorporated into the Bank's constitution in 2013. In 2002, the parent company The Co-operative Group Limited brought the bank and the Co-operative Insurance Society under the control of a newly incorporated holding society, Co-operative Financial Services, which became the Co-operative Banking Group in 2011.

As Britain's seventh biggest lender, the majority of the bank's revenue is made from interest charges on loans.

In 2013-14 the bank was the subject of a rescue plan to address a capital shortfall of about £1.9 billion. The bank mostly raised equity to cover the shortfall from hedge funds, while The Co-operative Group became a minority shareholder holding a 20% stake in the bank. In February 2017 the bank's board announced that they were "commencing a sale process" for the bank and were "inviting offers". In April 2017 the Co-operative Group wrote off its remaining 20% stake in the bank.

History

Origins

The bank was formed in 1872 as the Loan and Deposit Department of the Co-operative Wholesale Society, becoming the CWS Bank four years later. However, the bank did not become a registered company until 1971. In 1975, the bank became the first new member of the Committee of London Clearing Banks for 40 years and thus able to issue its own cheques.

Expansion

In 1974 the Co-operative Bank offered free banking for personal customers who remained in credit. It was also the first clearing bank to offer an interest-bearing cheque account, in 1982.

Following the UK Government's acquisition of 43.4% of Lloyds Banking Group in 2009, the Co-operative Bank entered into negotiations with Lloyds Banking Group to purchase over 600 of its branches. European Commission laws restricting state aid required the sale of the branches in a divestment known as Project Verde. In February 2012, press reports suggested that the Financial Services Authority (FSA) might intervene to block the purchase due to concerns about the Co-operative Bank's ability to integrate IT systems. It was rumoured that the FSA was particularly concerned that the Co-operative bank was still behind schedule in the integration of its IT systems with those of the Britannia Building Society, despite the fact that the merger took place in 2009.

The purchase was publicly announced in July 2012 and it was revealed that the branches would be initially split from Lloyds under the resurrected TSB brand. On 24 April 2013 the Co-operative bank announced that it had decided against proceeding with the deal. The reasons given were the poor economic outlook in the UK and an increase in financial regulation requirements. The Financial Times had previously reported that the Co-operative would require a £1 billion increase in capital to support enlarging the bank.

2013 financial crisis

In March 2013 the bank reported losses of £600m. In May Moody's downgraded its credit rating by six notches to junk (Ba3) resulting in the chief executive Barry Tootell's resignation.

Over the weekend of 15â€"16 June 2013 negotiations between the Co-operative Group and its regulator the Prudential Regulation Authority culminated in reports that the Bank had a shortfall in its capital of about £1.5 billion, and that this would be filled by a procedure known as a "bail-in" scheme. Bank Chairman Paul Flowers resigned shortly before the announcement of the shortfall. A press release by the bank issued on 17 June 2013 explained that the scheme would compel subordinated (also known as junior) bondholders to convert some or all of their assets from debt instruments to ownership ("equity") shares of uncertain value which would be listed on the London Stock Exchange and a new fixed income instrument. The scheme contrasted with the rescues of other British banks in 2008 and 2009 when central government introduced new capital into the failed institutions. Details of the outcome for small retail investors in the Bank were uncertain at the time of the June announcement, but it should be noted that there was no suggestion that ordinary deposits in the Bank would be put at any additional risk by the rescue, as they would continue to be covered by the existing compensation scheme. The bondholders had the opportunity to seek to reject the restructuring proposed, and an alternative option of the Bank of England taking over the ownership of the bank under the Banking Act 2009 special resolution regime was considered.

In September it was discovered that there was a £3.6bn funding gap between the value the Co-operative Bank placed on its loan portfolio and the actual value it would realise if forced to sell the assets. In October it was reported that the Co-operative Group had been forced to renegotiate the bank's £1.5bn rescue with US hedge funds Aurelius Capital Management, Beach Point Capital Management, and Silver Point Capital that owned its debt. As a result, the Group would lose majority control of its banking arm with the proportion of the bank's equity remaining under its ownership dropping to 30%, less than the 75% proposed in the original rescue plan. The plan passed a creditor vote and on 18 December 2013 a judge on the UK high court allowed the plan to move forward.

An independent review commissioned by the bank, published in April 2014, concluded that the root of the bank’s problems lay in its 2009 takeover of the Britannia Building Society and poor management controls.

2014â€"16 rehabilitation

The bank's current chief executive Niall Booker, a former banker at HSBC who nursed HSBC's sub-prime lending business back to health, was appointed in 2013. Since then he has been attempting to refocus the bank's strategy as a retail and SME lender.

Flotation on the London Stock Exchange was planned for 2014 but the plans were abandoned in March 2014 when a rights issue was announced to raise an additional £400 million. In May 2014 the bank finalised the £400 million fundraising plan and obtained shareholder approval, which reduced the Co-operative Group's ownership of the bank to just over 20%.

The Co-operative Bank lost 38,000 current account customers in the first half of 2014 after suffering what it called a "hurricane of negative publicity" following the lender’s near collapse. However, this loss was partly offset by 9,700 who switched to the bank â€" double the number who joined six months earlier, resulting in a net loss of 28,199 customers (around 2% of the bank’s total). The rate of loss slowed significantly in 2015, resulting in a loss of 2,250 current account customers between January and August of that year.

Nevertheless, the bank reported progress in its rehabilitation, as its losses sharply narrowed and it strengthened its capital position. Figures released by the bank in August 2014 for the first half of the year showed a pre-tax loss of £75.8 million was identified, compared to £844.6 million for the same period in 2013. Co-op Bank also said its core Tier 1 capital ratio, a key measure of financial strength, stood at 11.5 percent at the end of June and was expected to be significantly above the previous guidance of 10 percent at the end of 2014. However the bank, as expected, was unable to meet the new Bank of England financial stress tests in December 2014.

In late 2014 the bank sold its repossessed properties business for £157.5 million, and its ATM operating business for £35 million. It also outsourced its mortgage servicing operation to Capita, transferring about 660 staff to Capita.

The narrowing of losses was driven largely by a faster-than-expected reduction in unwanted assets, including significant parts of the portfolio of sub-prime mortgages the bank inherited from its merger with Britannia Building Society. Non-core assets reduced by £1bn, and credit impairments improved. In August 2014 the bank said it had cut staff numbers by 21 percent (about 1,560 workers) in the previous year and that there were more job losses to come. The bank had also closed 46 branches, reducing its branch network by 16 percent since the start of 2014. Another 25 would close in the remainder of the year, it said. In August 2015 the bank said that it had closed 62 branches over the previous year, taking the total down to 165. This was partly due to a 28% drop in in-branch transactions resulting from a change in demand from branch to internet banking. By that point staff reductions had exceeded 2000 workers. After the closure of 54 branches during the first three months of 2016 the bank described its programme of branch closures as "mostly finished".

In December 2014 a Bank of England assessment measured the bank's core capital ratio (a measure of financial strength) at minus 2.6%. As a result, the bank appointed Bank of America Merrill Lynch to help sell £6.6 billion of mortgages.

The bank is not expected to make a full-year profit until 2017 at the earliest. In August 2015 Booker said that he expected the bank would be "part of the consolidation of some of the country’s smaller banks", and that stock-market floatation would remain an option for the future. He said that there had been "no meaningful discussions" concerning the suggestion that the hedge funds which own 80% of the bank's equity were looking at buying up the Co-operative Group’s remaining 20% holding.

On 1 April 2016 the bank announced a pre-tax loss for 2015 of £611m, more than double the loss of £264m for 2014. Booker’s salary rose to £3.85m from its 2014 level of £3.1m, an increase of 24.2%. In November 2016 the bank announced a reduction of the workforce to 4,015, a loss of 200 staff.

2017 sale process

In February 2017 the bank's board announced that they were "commencing a sale process" for the bank and were "inviting offers". They said that they were also considering options other than a sale to build capital, including raising cash from new and existing investors. A statement from the Co-operative Group indicated that it supported the decision. In April 2017 the Co-operative Group wrote off its 20% stake in the bank.

Membership prior to financial crisis

Despite its name, the Co-operative Bank was not itself a true co-operative as it was not owned directly by its members. Instead it was part-owned by a holding company which was itself a co-operative â€" the Co-operative Banking Group. Its customers could, however, choose to become Co-operative Group members and hence indirectly acquire an ownership interest in the bank, earning dividends on their account holdings and borrowing with the Bank.

The bank also had approximately 2,500 preference shareholders, which were irredeemable fixed-interest shares. These shareholders could attend the bank's general meetings, but only had speaking and voting rights if the dividend is in arrears, or on any resolution varying their rights or winding up the bank.

Unlike other co-operative banks, such as the Dutch Rabobank, the Co-operative Bank did not have a federal structure of local banks, instead being a single national bank.

In 2015 the campaign group Save our Bank (which has 10,000 supporters) proposed a plan for customers to directly own part of the bank. A "Union of Co-op Bank Customers" would be created along with a mutual fund that would buy a minority stake in the bank.

Ethical policy

The Co-operative Bank operates an Ethical Policy and has an ethical code of conduct as part of its constitution. The Ethical Policy is overseen by a values and ethics committee chaired by an independent director. The Ethical Policy excludes the provision of any banking services to businesses which take part in certain business activities or sectors. These include a commitment not to finance "the manufacture or transfer of armaments to oppressive regimes" or "any business whose core activity contributes to global climate change, via the extraction or production of fossil fuels". The bank estimates that it has declined finance totalling in excess of £1bn since the policy was introduced in 1992. The Policy is based on a regularly renewed customer mandate in the form of a survey. In the 2005/06 financial year, whilst making profits of £96.5 million, it turned away business of nearly £10 million.

The Policy only applies to the balance sheet of The Co-operative Bank and never applied to other Co-operative Group businesses such as The Co-operative Asset Management, the Group's asset management business. Nevertheless, this business received criticism in 2009 for not following the Bank's Ethical Policy and in 2013 it was sold to the Royal London Group.

In June 2005, the bank closed the account of a Christian evangelical group (Christian Voice) because of its standpoint on homosexuality, specifically the group's "discriminatory pronouncements on grounds of sexual orientation". They said the group was "incompatible with the position of the Co-operative Bank, which publicly supports diversity and dignity". Christian Voice said the bank was discriminating against it on religious grounds. Gay Times subsequently selected the Co-operative Bank for its Ethical Corporate Stance Award.

In late 2014 the bank undertook an advertising campaign to promote its Ethical Policy. The Co-operative Bank brand subsequently came top in YouGov's survey of the most improved brands of 2015.

Divisions

Smile

The bank launched a separate internet-only operation known as Smile in 1999, which, according to surveys, has the highest satisfaction ratings among UK banks and has received many awards in recent years for customer service and online banking. It has around half a million customers. Smile has its call centre based at a unique pyramid building in Stockport.

Britannia

In October 2008, it was reported that Co-operative Financial Services was in talks with Britannia Building Society with a view to sharing facilities and possibly a full merger. Such a venture was facilitated by the passing of the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007, although further secondary legislation was required before such a merger could take place. On 21 January 2009, Co-operative Financial Services and Britannia Building Society agreed to a merger, with the new "super-mutual" being brought under the stewardship of The Co-operative Group. The proposed merger was subject to a vote by Britannia's members at their AGM at the end of April 2009. On 29 April 2009 Britannia's members voted overwhelmingly in favour of the merger.

In the short term, both Britannia Building Society and the Co-operative Bank continued operating their own products, branch networks and systems. All Britannia branches were due to be rebranded under the Co-operative name by the end of 2013, but this was abandoned in the wake of the financial crisis, with a great many simply closing and only a smaller number being retained and converted. In 2014 an independent review reported that the problems faced by both companies had been exacerbated by the merger. In the same year the Deputy Governor of the Bank of England, Andrew Bailey, told the Treasury Select Committee that the Britannia Building Society would have collapsed if it had not been taken over by the Co-operative Bank.

Independent financial advice

The Co-operative Bank withdrew its CIFA network in October 2011, and this was replaced by the Co-operative Banking Financial Planning Service, which is provided by AXA Wealth. AXA Wealth was also withdrawn, in April 2013. The Co-operative Bank has not replaced AXA Wealth.

Technical problems

In 2009, the Co-operative Bank received considerable public criticism from business customers for problems with the bank's business internet banking service. It subsequently emerged that the service crashed when more than 130 users logged on simultaneously, and some business customers were left unable to access their accounts for days.

In 2011, some Co-operative Bank customers were left temporarily unable to use their debit cards as a result of IT problems.

Controversies

On 17 November 2013, Labour Party advisor and the former Co-operative Bank Chairman, Rev. Paul Flowers, was caught by the Mail on Sunday buying crack cocaine and methamphetamine. The former Labour councillor served as the Bank's chairman from April 2010 until June 2013 and it was under his chairmanship that in March 2013 the bank reported losses of £600 million. In May, Moody's downgraded its credit rating by six notches to junk (Ba3) and the chief executive Barry Tootell resigned. Flowers was suspended by both the Labour Party and the Methodist Church. On 19 November it was discovered that Flowers had previously resigned as a Labour Party Councillor for Bradford Council after "inappropriate" content was discovered on his computer.

On 19 November 2013, the group's Chairman Len Wardle, who led the board which appointed Flowers to his position, resigned "with immediate effect" over the Flowers scandal.

See also

• The Co-operative Credit Union
• Co-operative Permanent Building Society

References

Further reading

• Wilkinson, Adrian; Balmer, John M.T. (1996). "Corporate and generic identities: lessons from the Co-operative Bank". International Journal of Bank Marketing. 14: 22â€"35. doi:10.1108/02652329610119292. 

External links

• Official website
• The Kelly Review