Euan Sutherland: We face challenges, but we will recover

I recognise that I have joined the Co-operative Group at a difficult moment in its history. I believe that it is a moment that we will recover from and that we remain a business and a brand with a unique place in the hearts of the British public.

When I took up the post of Group CEO in May, I was not expecting my first few months to be dominated by the very serious issues that have emerged at the Bank. As the true scale of the problems we faced became clear I knew we had to act decisively. The first step was to begin to build a team with the right experience and skills and the drive and passion to deliver change. We have now significantly strengthened our financial, corporate and turnaround skills with a series of appointments and I am proud to lead a great team that will deliver our comprehensive plan to stabilise the Bank and to put together the wider Bank and Group turnaround plans.

Let me talk you through the most senior new members of the team. The appointment of Rebecca Skitt as Chief HR Officer marked the start of changes to the senior team at the Group. Rebecca joined the Group in April, with more than 20 years of international experience in HR, specifically in consumer and financial sectors, latterly working directly for Anthony Jenkins, now chief executive at Barclays, in a number of senior roles across the bank, including HRD Global Retail and Business Banking. Niall Booker joined the Group as Banking Group Chief Executive and Deputy Group Chief Executive. Niall has over 30 years’ experience in banking and joined the Group following a series of senior roles as a member of HSBC’s Group Executive, including as Chief Executive Officer of HSBC North America.

Richard Pennycook, the Group's Chief Finance Officer, joined the Group in June. He had previously worked at Morrisons, JD Wetherspoons and the RAC, where he had led successful transformation programmes. In May, Nick Folland joined the Executive team in a new role as Group Director External Affairs. Nick came from successfully leading the Net Positive sustainability agenda at the Kingfisher Group and will also oversee the Group CEO office. Alistair Asher has joined the management executive in a new role as Group General Counsel. Alistair joins the Group from Allen & Overy, the law firm where he spent 34 years, 26 of them as a partner and latterly as Global Head of the firm’s Financial Institutions Group. These changes follow the appointment in July last year of Steve Murrells to lead our Food business, and more recently a wider brief to head our Food, Pharmacy and Electrical business under one Retail Division.

At a non-executive level, Richard Pym has joined the Co-operative Group as Chairman of the Banking Group. Richard was formerly Group Chief Executive of Alliance & Leicester and is currently Chair of UK Asset Resolution, a position he will retain as a completely independent part of his portfolio.

All of these high-quality leaders have joined the Group in the past few months and, with other colleagues, are beginning to get to grips with the challenges and opportunities we have ahead. As we report our half year performance, the full scale of the problems within the Bank is laid bare and the difficulties that stem from this become clear, with implications for the Group as a whole. In keeping with the 2012 year-end figures, the Bank’s issues have pushed the Group into a £559m loss before member payments. We clearly communicated in June that this would be the case. Impairment charges were taken into account when we put in place the Capital Action Plan to stabilise the Bank.

At the same time, the results also show the wider work that is needed to transform the Group. Revenues across the Group fell 1% to £5.8bn, with our family of Trading Group businesses delivering solid performances in difficult markets and cash flows improved. This contributed to a fall of £474m in net debt from the year end, which was also driven by the proceeds from the sale and leaseback of our new head office, 1 Angel Square. However, the challenges those businesses face are clear and we believe they can do better. The rest of the top team and I have started a wider strategic review of the Group that will look at how all of our businesses can be improved and what other changes need to be made to our strategy and focus. The detail of the turnaround plan for the Group will be outlined to members at the Annual General Meeting in May 2014, with an update on progress when we make our annual results announcement in March 2014.

In the plan that we announced on 17 June, we explained that the capital shortfall in the Bank was £1.5bn, as agreed with the Prudential Regulation Authority, the banking regulator. Today’s results reaffirm that requirement, which also covered currently anticipated future losses. Finding a solution to the difficulties we face required us to balance our responsibilities to our members, to investors in the Bank’s bonds and preference shares and to the financial lenders to the Group. This was not easy. Our priorities were three-fold: to stabilise the Bank, to develop a plan to ensure the long-term profitability and sustainability of the Bank and Group as a whole, and to avoid seeking taxpayers’ help.

After detailed consideration of all the options, we developed and announced our plan in June. As the owners of the Bank, given its financial position, our equity stake is effectively wiped out. Now, via our planned contribution to the Capital Action Plan of up to £1bn, we are shouldering the majority of the burden in stabilising the Bank.

We are also asking affected bondholders and preference shareholders to contribute to a plan that we believe is in the best long-term interests of our and the Bank’s respective stakeholders and one that will prevent more severe adverse consequences for all stakeholders which might occur in the absence of such support. Our new equity stake in the Bank, following the Exchange Offer, will come only as a direct result of our planned substantial contribution and, as such, we will be the only party injecting fresh money into the business. I believe we have devised a plan for the Bank that is fair and that balances the needs and long-term interests of the Bank’s and the Group’s stakeholders. Our planned contribution of up to £1bn demonstrates our long-term commitment to the Co-operative Group’s provision of banking services.

This contribution comes through our issue of a new Group senior, unsecured fixed income instrument as part of the Exchange Offer, which will be used to finance the Group’s acquisition of new ordinary shares in the Bank. The £500m to be contributed in 2014 is expected to be primarily funded through the sale of our profitable general insurance business and from the proceeds of the already completed sale of the life insurance business to Royal London. Our majority holding of the new ordinary shares in Bank, coming only as a direct result of our planned substantial contributions, will ensure that our members continue to have a say in the ethical leadership that we wish the Bank to continue to pursue.

A great deal of intensive work is now underway to prepare the prospectuses to implement the Exchange Offer and the listing of the Bank’s ordinary shares on the London Stock Exchange. For the plan to work, it will require a significant proportion of the Bank’s subordinated capital securities holders to agree to exchange their current investments for new securities, including new ordinary shares in the Bank.

We are acutely mindful that we cannot move on from all of this without learning some very salutary lessons. To that end, we have set up an independent review to be chaired by Sir Christopher Kelly. Sir Christopher will report his findings and recommendations next spring. In spite of all our issues, what remains clear to me is that we have considerable potential and our task is to ensure that we achieve that potential and become the great revival story of the next decade.

I look forward to sharing further progress in the months and years ahead. Finally, let me thank my senior leadership team for their enthusiasm and ambition for the Co-operative Group and our people across all our businesses for their continued dedication, loyalty and hard work.