The Co-operative Banking Group has submitted a bid for the 632 Lloyds TSB branches that the state-rescued bank is being forced to sell under European Union competition rules.But Co-op Banking Group chairman Paul Flowers told the News that the proposal is low risk and is not ‘betting the bank’.
“The overarching strategy is still to offer a compelling co-operative alternative,” explained Flowers.“That means we have to punch above our weight and make certain we achieve better scale – because a bank which currently has 2% of the domestic market of the United Kingdom – albeit with a bunch of really lovely customers who value what we do, and who value the bank’s services, and, in particular, a bunch of institutional customers, local authorities and others, who know we are a good bank – still is insufficient scale.
“If we are really going to offer a ‘co-operative alternative’, we need to achieve much greater scale, which is why the prospect of making a bid for the Lloyds TSB carve-out is quite crucial.We have had to weigh-up – and are still weighing-up – the pro’s and con’s of that possible deal.
“We have put in a firm bid for the process, which we agreed at the board two or three weeks ago, and we are awaiting a decision of the Lloyds’ board on that matter.Two days ago [on the 23 November], Lloyds announced that there were only two bidders left in the process, which is ourselves – which happens to be the only bank with any scale – and NBNK, which is effectively a private equity outfit, led by Lord Levene and a number of other peers from the House of Lords.”
There is a deep irony here for the co-operative movement, as one of the better known peers who has taken a position as a director of the NBNK banking operation bidding against the Co-op is Lord McFall, who as John McFall was a Labour and Co-operative MP and chair of the Treasury select committee.
“I am saddened and disappointed that a former Co-operative MP has not seen the light,” said Paul.“But notwithstanding that, we are clearly the only credible bidder.The Lloyds board has to decide by the end of December whether to do a deal with ourselves or NBNK or to do what is called an IPO.”
IPO is an ‘Initial Public Offering’ – in other words floating the 632 branches that are up for sale as a separate new company on the stock exchange.However, there are two problems with that approach.One is that the market for new share listings in the current climate is weak.The second is that this would be a demanding task for Lloyds, potentially distracting them from focusing on turning round the bank.This is particularly true as its only recently appointed new chief executive, Antonio Horta-Osorio, is currently on sick leave, recovering from exhaustion.
“If I was sitting round the Lloyds Group board table, and even if I was unhappy with the nature of the bids being offered, I would probably want to cut and run and do a deal,” suggested Flowers.“We are serious about wanting to do a deal that could offer us considerably greater scale, bring with it not just 632 branches – including the entire former Scottish TSB estate and the entire former Cheltenham & Gloucester estate – and which would enable us to have a much greater presence within the home market.
“It seems to me that if we are actually serious about the proposition that we offer- and we are – that we are a really good relationship bank – again, we are not perfect, we could always be a bit better – but on all the polls that are conducted on the standard of service offered in high street banks, we always come out number one.Always.
“If we actually believe that, then we would make that potential deal a success.If we have self-belief in what we are offering as a co-operative alternative, then we are much more likely to project that to the customers that we acquire from Lloyds through the deal.”
The issue of attrition has been raised by some commentators who have been concerned by the bid from NBNK as a new start banking operation.The suggestion is that if NBNK does take over the Lloyds TSB portfolio, it may do little to increase competition in the market – customers could simply opt back into the remaining Lloyds business, leaving NBNK with merely a rather expensive collection of real estate.
The Co-operative Banking Group has analysed its potential exposure to that risk and believes it would be largely immune.Flowers points to studies of comparable previous deals and argues that the Co-op’s high quality of customer services would lead to it retaining the vast majority of acquired customers.
One of the things clear from Flowers’ carefully worded comments is that the bids may be difficult for Lloyds to compare.While NBNK’s bid is understood to be worth £1.5bn, Paul refers to the Co-op bid as being structured to provide Lloyds with an incentive for the deal to succeed.This would potentially protect the Co-op from the risk post-disposal that Lloyds would seek to recover the lost customer base.
Flowers strongly rejects the suggestion that bidding for Lloyds – which would multiply the size of the banking operation, potentially giving it a 7% market share – is an all or nothing throw of the dice.“We are not betting everything,” he insisted.“When you see the things that you will eventually see,you will see that it is not betting everything.Far from it, in fact.It requires investment, but nothing like the scale of investment that has been speculated about in the financial press.”
That is not to say that the bid is risk free for the Co-op.“There are always risks.In terms of the financing, it carries some risk.You never get anywhere in developing that sort of business unless you take some risks.If you look at co-op models in different parts of the country or the world, co-ops that have never taken any risks are mainly dead and buried.
“But the co-ops that have taken risks in order to develop the model and develop the business are the ones who get the prize of sustaining and developing their business.So, of course you must take some risks, but you must quantify it and understand what it is.And that is what we are trying to do.”
Despite the determination of the Co-operative Banking Group to win the bidding war for the Lloyds’ branches, it also has a strategy in case it is unsuccessful.Paul Flowers explains that alternative strategy in the second half of his interview with the News in the next issue.
Second part of Paul Flowers interview
In the last issue, Co-operative Banking Group chair Paul Flowers explained the approach taken by the Group in its bid for a portfolio of 632 Lloyds TSB branches that are potentially being sold.In the second half of that interview, Flowers explains the Group’s alternative strategy.
“If we don’t acquire the Lloyds TSB branches,” said Flowers, “then our strategy is still to grow organically and to still seek investment of several hundred million pounds over the next few years, to enable the bank branch network to grow, to roughly 500 branches, as opposed to the [current] roughly 340 odd and to clearly target certain areas of primary current account customers – private individuals – and to clearly target institutional customers as well.That takes a lot longer, so my clear preference is to do the sort of deal which is currently available, not withstanding that that brings with it some obstacles and some risks.”
Whether or not the Lloyds’ bid is accepted, the main risk facing the Co-op, said Flowers, is the risk of further economic decline, not least in the eurozone.Happily, says Paul, the Co-op has very little exposure – “almost non-existent” – either to sovereign or currency risk in the eurozone.“The issue is that if that goes badly wrong, that will affect everybody.There will then need to be such structural support to enable every institution to be sustained.Actually, our model of doing business has not needed structural support.We have been very liquid and very cautious and very prudent about how we run our business .”
Under proposed new banking capital liquidity requirements, banks will need 9% capital reserves.The Co-op is comfortably above that at 9.6% and seeking to hit 10% – though both RBS and Barclays will be in trouble according to some analyses if those capital levels come in at a time when sovereign debts in the eurozone are being written-off.
By contrast, the Co-op is sitting pretty – even though Moody’s credit ratings agency recently downgraded the Co-operative Banking Group.This reflected indications from the Government that if the financial crisis hit rock bottom, the Co-op is not regarded as one of the systemically essential banks that are ‘too big to fail’ and would need government rescue.However, as Flowers stressed, the Co-op was the only bank recognised by Moody’s in the same assessment as becoming even less likely to fail – because of its liquidity buffer and prudent management.
“Some people seem to have ignored that,” complained Flowers.“So the agencies do understand that we are a well run, well managed, bank.
There is, though, a further challenge, which could also be a risk.Ironically, the Co-op is investing in branch networks – and potentially investing much, much more – when the future of bricks and mortar branches is unclear.The Co-op has been, after all, a pioneer of internet banking, particularly through the Smile brand.
Flowers explained that in terms of customer profile “there is a differential” between the Co-op and other banks.“We seem to have a more articulate and marginally more affluent customer base than most other banks,” he said.“The image of the Co-op Bank that used to pertain of being a down-market bank for the poor is not true at all and we know where our current customer base is and we know we need to extend that customer base from that pretty stable core that we have already got – which is now approaching 600,000 primary current account customers, people who do all their main banking business with us, we have one and a half million total accounts – and we know from the studies that we do that we have to extend that out to other cohorts of people.”
“You have to weigh-up the relativities of how your customers do their banking,” continued Flowers.“Our branches are well run.We know that lots of our customers want to use branches and value the customer relationship and we are trying to develop the range of other products that we sell through those branches, as well as through the other channels, internet and telephone.”
And the cross-selling of other financial products – particularly mortgages, but also insurance – helps to explain the renewed focus on branch banking, which has been backed post-Britannia merger by a massive investment in new IT systems.“Branch banking ain’t dead yet!,” stressed Flowers.
“£750m of investment [in I.T.] over a period of time is being delivered through the world leading companies who do these systems, Infosys, based in Bangalore, and their partner Steria, based in Delhi.Some of that has already been rolled out to general acclaim and happiness, particularly to our corporate customers and the rest of it is being rolled out in the next two years and will be finished by the end of 2013.”
The installation of the new IT has involved a close relationship between the Co-op and the two contractors, with hundreds of staff from India being located at any one time in Manchester.“We have a board sub-committee, which has independent expert advice, which enables the board members to keep an eye on the progress of the development of that system and to ask appropriately well informed questions.So we are doing our best to keep executives on the straight and narrow.
“We will have a state-of –the-art I.T. platform that will be the best of any bank in the UK or Europe.”That will lead, if all goes well, to a much higher level of cross-selling of products to customers and make it much easier for staff to understand customers.However, emphasised Flowers, the expectation is that staff levels will increase, not be cut.
While the Co-op does not want to take on the role – to an extent carried out in recent years by the Nationwide – as being the saviour of weak building societies, Flowers said the Co-op has been actively involved in supporting some societies by providing liquidity where necessary, “against good collateral!”.“I think that was welcomed and appreciated by our colleagues in the building societies,” he said.“If there are building societies in the future that want to associate themselves with us in building a vibrant co-operative sector then we will be very happy to talk to them and work with them, whatever form that work takes.”
Flowers warned that there could be further difficulties and consolidation amongst building societies.“One has to question the future going forward for that whole sector unless they find a way of transforming themselves, not least when a number of them have been reduced in terms of their ratings to effectively junk bond status, which is where some of them are now at, which prohibits them from doing any sustained business in terms of capital markets and stymies their opportunity to do anything other than loans for mortgages and savings, the margins on which are tight.They have to examine where they are going.”
Paul demonstrated the extent to which he is anything but a typical bank chairman when he revealed his strong sympathy for the ‘Occupy’ anti-banking movement, suggesting this presented an opportunity for the co-operative movement.As a Methodist minister, Flowers believes that both the demonstrators and the church need to recognise they have roles in moving society on from the crisis.
“I was in New York a few weeks ago and I went to see the Occupy Wall Street people,” said Paul.“If I had been asked by a journalist while I was there, I would have said they were on the side of the angels – that they were entirely demonstrating about the right things.They were right to protest the huge excesses of the market and the way that they had exhibited, and continued to exhibit, enormous greed.
“It is right that we find ways of objecting to that.We can admire the resolution and the courage of those young people, who have been demonstrating in lots of places.But you still then have to find a way through between the gross excesses of an uncaring and unthinking capitalism, where people are still only seeing their own personal interests and the provision of responsible decent banking and other financial services, which we need, but which need to be provided in a way that they are respected and trusted.I would hope that the young people who are demonstrating, with all their wonderful idealism, would see that you have to find a pragmatic way through.
“We need to keep on reminding people that there are people who are providing financial services who do have a more ethical perspective.We are not perfect – who is?But we still need to try to provide something that people want to have, which is provided well and ethically.”
Ethical considerations have also governed Paul’s own life.He recently stood down as a Labour and Co-operative city councillor in Bradford, given the commitments he has as chair of the banking group, deputy chair of the Co-operative Group and a Methodist minister, as well as a councillor.“I thought that after 10 years, I had done my bit,” he says.“It was impossible to sustain all of it.”An understandable conclusion.