The Co-operative 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-operative Banking Group Chair Paul Flowers told the News that the proposal is low risk and is not ‘betting the bank’.
Lloyds is set to make its decision public tomorrow on whether the Co-operative Group, or the other contender NBNK, has made a successful bid.
Explained Mr Flowers: “The overarching strategy is still to offer a compelling co-operative alternative. That means we have to punch above our weight and make certain we achieve better scale — because a bank which currently has two per cent 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 pros and cons 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.
“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.
“However, 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. The Lloyds board is due to make its decision during its December 15th meeting.
“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 Mr 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 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. 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 an 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. Mr 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 Mr 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, Mr Flowers 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 Group from the risk post-disposal that Lloyds would seek to recover the lost customer base.
Mr Flowers strongly rejects the suggestion that bidding for Lloyds — which would multiply the size of the banking operation, potentially giving it a seven per cent 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 Group. “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. That is what we are trying to do.”
Despite the determination of the Co-operative Group to win the bidding war for the Lloyds’ branches, it also has a strategy in case it is unsuccessful.
“If we don’t acquire the Lloyds TSB branches,” said Mr 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 Group, said Mr Flowers, is the risk of further economic decline, not least in the eurozone. Happily, says Mr Flowers, 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 nine per cent capital reserves. The Co-op is comfortably above that at 9.6 per cent and seeking to hit ten per cent — 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.
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.
Mr 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 Mr 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 £750m investment in new IT systems. “We will have a state-of-the-art IT 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 Mr Flowers, the expectation is that staff levels will increase, not be cut.
Mr Flowers 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 co-operatives. As a Methodist minister, Mr Flowers believes 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,” he said. “If I had been asked by a journalist while I was there, I would have said they were on the side of the angels. 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.
“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 his 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-op Group and a Methodist minister. “I thought that after ten years, I had done my bit,” he says. “It was impossible to sustain all of it.” An understandable conclusion.
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