Announcing its results for the first six months ended June 2015, the Co-operative Bank reported losses before taxation of £204.2m. The amount is triple from the loss of £77m in the first half of 2014, but the bank said the loss was better than “management targets”.
The interim report shows the bank has strengthened its capital resilience as it continues work to embed and improve the Risk Management Framework, a key focus in both of the Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) investigations.
On 11 August an enforcement investigation conducted by the PRA, with support from the FCA, found inadequacies in the Co-operative Bank’s risk management framework policies and in its capital management and corporate lending policies and procedures during the period from July 2009 to December 2013. The FCA waived a £120m misconduct fine for the bank’s failure to properly manage its capital.
According to the interim results, the bank had a Common Equity Tier 1 ratio of 14.9% at June 2015, an increase from 13% at December 2014. Total assets also reduced from £10.8bn at the end of 2014 to £8bn, which resulted in a reduction of £1.9bn of Risk Weighted Assets.
The bank improved its total capital position by the issue of £250m of Tier 2 subordinated debt in July 2015. In the first half of 2015 the business also increased its net interest margin by 12 basis points (0.12%) to 1.32%. The report states the improvement is due to a combination of deposit repricing, reduction in overall deposit levels, and mix change.
The total operating costs were also down to £259.6m in the first six months of 2015, following changes made to the bank’s cost reduction programme. However the bank witnessed an increase in project costs to £101.9m for the first half of 2015 from £68.8m for the same period last year. The report explains that this was due to investment in systems and processes particularly IT transformation. The bank has also continued to invest in the brand, with a new advertising campaign based around ethical credentials and supporting the bank’s current account switching offer.
It continues to be affected by the series of scandals that started in 2013 that led thousands of customers to switch to a different lender. Two years ago the bank revealed a £1.5bn black hole in its balance sheet and had to be rescued by hedge funds. The Co-operative Group, the previous owner of the bank retains a 20% stake in it.
Chief executive Niall Booker said: “Over the first half of 2015 we have continued to make real progress delivering our turnaround plan focusing on reducing our risk weighted assets to increase our ability to withstand economic stress, on making our IT platform more robust and reshaping the Bank around our individual and small business customers.
“Our work to improve resilience and reduce costs is on course. In addition, although the Core bank remains work in progress, its performance is also beginning to improve as we increase efficiency, continue to re-invest in the brand and work with customers to offer competitive products that meet their needs. Of course, we have always said that addressing legacy issues will continue to dominate financial performance for some time and there is considerable work ahead towards a full recovery.”
The interim report explains the loss was a result of new losses on asset sales of £38.2m as a result of a reduced income in the non-core bank as a result of deleverage (reducing the percentage of debt in the balance sheet of the non-core bank); losses on asset sales of £38.2m; an increase in project costs to £101.9m; and reduced impairment gains in non-core (reduced gains from the bank’s non-core capital stock). The bank also has to cope with £49m of conduct and legal risk charges, including increases to existing provisions for packaged accounts and mortgages.
“Moving forward, we need to stay focused on meeting threshold conditions and continuing to make the bank more resilient. We must also focus on keeping our products simple; continuing to reinforce risk management and systems; strengthening our culture and maintaining our high levels of service. The transformation of the bank remains challenging, however, this should not diminish the progress made against our strategic plan. The actions we are taking are creating a resilient bank that can stand alone, distinguished in the marketplace by its values and ethics. This is fundamental to driving value over time for all our stakeholders – customers, colleagues, shareholders and the communities we serve,” added Mr Booker.