Coventry Building Society has completed its £780m acquisition of the Co-operative Bank, which is again now part of the mutual sector. The Bank was never previously a mutual organisation itself, as a plc subsidiary of the Co-operative Group. It was, though, part of the mutual sector. That changed when hedge funds took it over, after the Bank hit the buffers as the 2008 financial crash sent shock waves through the economy.
There was no single cause of the Bank’s collapse – it was severely damaged by an ill-considered merger with the Britannia Building Society. This was actually a rescue of the stricken building society, but the Bank was unaware of the scale of the society’s liabilities. Simultaneously, the Bank committed itself to an expansion of branch presence at a time when the rest of the sector was cutting back; and it had grand plans to increase its range of financial products and also to take over much of the branch network of the giant Lloyds Bank. Taken together it was a massive over-reach.
The signs are better this time for the coming together of the Bank and a building society. The Coventry is the UK’s second largest society based on assets held – which total £62bn. Only the Nationwide, with £270bn, is larger. Coventry is also the UK’s eighth-largest mortgage lender.
Coventry has a strong balance sheet and two million member-owners. In the first half of 2024, it recorded a pre-tax profit of £159m, down from £269m in the comparable period in 2023 – reflecting tougher trading conditions. Savings account balances rose in the period to £48.8bn, while outstanding mortgage loans were recorded at £51.4bn. The arrears rate was low at 0.31%, compared to an industry average of above 1%.
The Co-operative Bank has itself emerged from its crisis to produce strong financial results. In the 2023 full financial year it reported a pre-tax profit of £71.4m. In a sign of its confidence that year the Bank acquired Sainsbury’s Bank’s mortgage portfolio of 3,500 customers and £500m of loans. When the merger of the Co-op with Coventry was announced to the London Stock Exchange, the combined balance sheet of the merged institutions was stated to be £89bn.
Related: Coventry Building Society appoints Andrea Melville as Co-op Bank CEO
So while this deal is an acquisition by Coventry of the Co-operative Bank, it is also a merger of what are now two apparently strong institutions with comparable and compatible ethical policies. The Financial Conduct Authority and the Prudential Regulatory Authority gave approval to the acquisition in November last year.
Fitch Ratings responded positively to the regulators’ decision, upgrading the Co-operative Bank’s ratings to BB+, while retaining Coventry’s rating at A-. This decision was “reflecting Fitch’s view that Coventry’s credit profile will remain strong, underpinned by a low-risk business model with strong asset quality and liquidity buffers. However, the acquisition will involve significant execution risks and reduce capital and leverage buffers.”
It added that the Co-operative Bank “will benefit from a high likelihood of support from the new, higher-rated owner”.
Moody’s Ratings has been more cautious and downrated Coventry by one notch, recognising that the Co-operative Bank remains a weaker entity, despite its substantial recovery. It simultaneously upgraded all ratings and assessments of the Co-operative Bank.
These decisions may marginally increase borrowing costs for the Coventry, while reducing them for the Co-op. However, there is a clear consensus that the merged entity will be a strong one. The current situation of the Co-op Bank reflects well on the management skills on those who have taken it beyond near collapse.
Nick Slape, the Bank’s CEO, said at the time of the announcement: “We have successfully transformed and simplified the Bank into one that is now sustainably profitable with a strong capital and liquidity position. This transaction is a natural next step and presents an exciting opportunity.”
Coventry’s CEO, Steve Hughes, becomes the CEO of the enlarged entity. He said last month: “Bringing our two values-driven organisations together will result in a mutually owned business that’s deeply passionate about its members, customers and communities.”
It will take several years before the two brands operate as an integrated institution. Doing this gradually is no bad thing and should improve risk management. Eventually, they should provide a joined-up service.
For the present, the two organisations remain structurally separate and anyone who is a customer of both retains separate coverage from the Financial Services Compensation Scheme. This means that any person who is a customer of both the Coventry Building Society and also of the Co-operative Bank has their savings protected up to the value of £85,000 in each. In truth, there seem to be no grounds for anxiety in relation to the merged institution.
Where there might legitimately be a concern about the acquisition is the intention of Coventry to use it to increase its branch network. While retention of branches has enabled building societies to strongly differentiate themselves from the high street banks that are making closures, they do create heavy overheads. It was swimming against this strong tide that was a significant factor in the meltdown of the Co-operative Bank.
However, mortgage lending is different from other aspects of banking. Only 28% of mortgage borrowers research and commit to mortgages via online channels. In part, this is because of the preference for in-person contract signings for such a large transaction as a mortgage.
More than half of all other banking transactions are both researched and conducted online, including for the opening of savings accounts. This helps to explain why building societies believe they can continue to invest in branch networks, as long as they also constantly improve their online presence and technologies. Last year Coventry launched a new app and increased its digital investment. Coventry will hope that it has the right balance between branch and digital.
There was enormous anger at the mismanagement that led to the near-collapse of the Co-operative Bank. The takeover by Coventry has provided a really positive codicil to that sorry event. There can be confidence in the solidity of the new combined institution and its expanding digital presence will enable people from across the country to use the merged services. This is a good news story for mutuality – even if it would never have been necessary if the old Bank had been better led and managed.
