By Josh Black
Does it matter whether the Co-Op saves its troubled bank?
In 2011, Britain’s Co-Operative Group unveiled a new marketing campaign inviting consumers to “Join the Revolution” – a movement billed as “the most radical sustainability programme in UK corporate history” designed to “spearhead its membership drive and help build a more sustainable economy.”
Coming as it did in the wake of a financial crisis, just months before the country’s first ‘double-dip’ recession since the 1970s, there was a little hubris to the claim, but not much worse than many a marketing department has been responsible for.
Indeed, the language was even less surprising, because every time the Labour Party finds itself out of office, mutualisation re-emerges as a way of returning economics to the service of the people. Alongside the ‘John Lewis model’, the Co-Op is a hobbyhorse of Guardian types and the standard-bearer for this movement. So imagine if either was to collapse under the weight of its own incompetence, leaving behind a trail of strategic and administrative failures in its wake.
That, in fact, is the very position Britain’s Co-Op finds itself in. The Group made a loss of £2.5 billion in the year to 31 December, 2013, the worst in its 150-year history. Richard Pennycook, the Group’s Interim-Chief Executive, wrote in its annual report that “The credibility, trustworthiness and financial strength of the Group built up over nearly 150 years have been stripped away over the past five years. And yet if ever there was a time for the revival of a campaigning organisation owned by its Members, all of whose profits can be put to work in the communities where they live, it is now.”
Whether this sense of purpose applies to the bank itself is the question that the Co-Op should now be asking itself. It is already struggling to make the biggest payment yet in a plan agreed last year to plug a capital gap in its banking arm, and recently discovered additional costs related to breaches in consumer law connected to its lending activities. If the Group struggles to find the money, it may have to sell another chunk of equity in the bank, and could lose its veto on changing the bank’s constitution to broaden the bank’s ethical investment policy. At that point, the Co-Operative Bank would effectively become like any other high street institution.
That would be hard for supporters of the Co-Op’s aims to take. After the financial crisis, the Group saw an opportunity to secure its place at the top table of finance with a massive expansion. It swallowed the Britannia building society and made a bid for 632 branches of Lloyds TSB that it subsequently had to withdraw from. At the same time, it extended its ethical investment policy to its insurance products, greatly increasing the scope of assets it had to match up in the still limited universe of Socially Responsible Investing (SRI) targets.
These investments made very little difference to the bank’s profits, and indeed have been sold off for several years now. Once worth £14.5 billion, a large portion are now being run-off and will be worth less than £11 billion by the end of this year. Meanwhile, impaired loans and all-too-frequent one off charges have mounted steadily. After a ratings downgrade and years of low interest rates, businesses suddenly withdrew £3.3 billion from the Co-Operative Bank in 2013, leaving its capital markedly less liquid.
As a result, the Group sold 70 per cent of the bank to hedge funds and distressed investors late in 2013. Pennycook’s recent comment that this was the first rescue of a European Bank since the Banking Crisis began that did not involve recourse to the taxpayer is scant consolation, for while the governance failures that led to former City Minister Lord Myners being appointed to review the Group’s constitution apply to other areas of the Co-Op, the same stubbornness and arrogance is most unforgiveable in its bank. Unlike other areas in the Group, underperformance in banking does not just mean a gradual erosion of profits, but a sudden and difficult-to-reverse withdrawal of capital.
The Co-Op Group’s determination to retain control of the bank will only be meaningful if it can find an estimated £666 million to keep its part of the bailout agreement. Yet even if it clears this hurdle, the Group will have to make long-term commitments that its board currently looks ill prepared for. With Myners resigning ahead of the apparently inevitable failure of his reforms, the Group’s willingness to face tough choices looks to be in doubt.
Nonetheless, if the Group does find the money, it will have to let the bank to press on with its recovery without forcing it to adhere rigidly to the Group’s ethical ideals and amateur governance. The first step is to get professionals running the bank as soon as possible. It is said that the bank’s former Chairman, the now-infamous Crystal Methodist, Paul Flowers, once underestimated the size of the bank by a factor of 15. That will not do in these straitened times.
Second, the Group will now have to think less about how the bank can serve the movement as a whole, and more about whether it can generate the customers necessary to return to profitability. That may mean looking to banks like Lloyds, which announced a return to pre-tax profits earlier this year, almost entirely through having rebuilt the credibility of its books. Whether it chooses to surrender or to fight on, the ethical foundation of the Co-Op Bank looks less than sturdy.
Josh Black is a financial journalist and editor of the magazine Activism Monthly.