CFS weathers credit storm

Co-operative Financial Services’ interim results have shown a £46.2 million profit for the Bank, while Insurance reports a loss of £1.5m.


Total CFS profit before tax, significant items and short-term investment fluctuations for the 28 weeks to July 26th was £73.4m, up 93 per cent on last year. The improvement in profit was achieved through financial management and initial benefits arising from the CFS investment programme announced in 2007. 

Despite financial institutions facing the start of the credit crunch in the first half of 2008, the banking business recorded an increased profit before tax and significant items of £46.2m, compared to £45.5m in 2007.

A fall in bad debts to £45.3m from £53.2m last year has also helped the first half profit. The Bank said these results reflect its low exposure to the impacts of the economic down-turn with a cautious approach to lending, mostly funded by retail deposits.

Net revenue increased by £15.7m with an increase in net interest income of £13.3m. Non-interest income increased by £2.4m mostly from Link transaction fees from the Bank’s cash machines and growth in corporate commission compensated for lower insurance commission generated from payment protection insurance. During the period, the Bank has also reduced business-as-usual operating costs by £2.1m.

Average customer deposits of £9,279m grew by £1,116m (14 per cent). Average customer lending balances grew by £939m (12 per cent) to £8,824m reflecting growth in corporate and mortgage balances.

A 2007 final dividend of £25.9m was paid to CFS’ parent company, the Co-operative Group.

David Anderson (pictured), CFS Chief Executive, said: “This is a very solid performance in a tough market, building on the trust and responsibility associated with The Co-operative brand. While we aren’t immune from the economic consequences of the credit crunch, we have a strong balance sheet, very strong retail funding and a clear path for the future of our business.“

Meanwhile, the insurance side of the business was affected by turbulent market conditions and lower average premiums, according to CFS.

It said the underlying performance of the business continues to gather momentum and expects to meet its profit and sales performance targets at year end.

A £1.5m loss was reported by the insurance-arm — an improvement on last year’s loss of £33.3m due to exceptional weather. The general insurance claims ratio also fell by 19.5 per cent on last year to 74 per cent.

Gross written premium decreased by £5.9m to £220.9m with increasing sales volumes being offset by lower average premiums as a result of changes to CFS’ underwriting criteria. Sales volumes increased sharply in 2008 for both motor and home, continuing the upwards trend seen in 2007.

At the same time the general insurance business has continued to increase its distribution capability especially within the direct and intermediary channels. Combined with the change in distribution mix, 2008 new business has also seen a notable increase in lower-risk customer groups, which is the primary reason behind a decline in average premiums.

CFS has also introduced a number of initiatives to optimise its financial performance. These include a review of best practice in terms of case estimating, improvements to the flow of data between systems, and an on-going challenge to improve our speed of settlement.

A CFS spokesman said: “We operate a rigorous fraud management process to ensure our performance is not jeopardised by false or exaggerated claims, and this is continuously reviewed and improved. The latest published results of the ABI fraud management comparison of the industry show that for the second year running, we have achieved some significant successes and remain leaders within industry.”

Further modernisation initiatives have targeted savings in operating costs, including commission charges. Although these initiatives have reduced the level of operating costs, the expense ratio of 35.6 per cent has increased compared with 33.8 per cent in 2007 reflecting the decline in earned premiums.

During the first half of the year, CFS was recognised for its social responsibility by being named company of the year by Business in the Community and it also came third in the Sunday Times Best Green Companies Awards.

Added the spokesman: “At a time of economic turbulence and uncertainty CFS remains committed to maintaining its position as a global leader in corporate social responsibility. Later in 2008 it will seek a fresh mandate from its bank customers with regards to its unique ethical policy to ensure it reflects contemporary attitudes and opinion.”

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