Co-op replaces £8m Christmas dividend with food vouchers

Organisation says half-year payments to members unjustifiable in light of near collapse of banking arm

The Co-op has unveiled a new rewards scheme after being forced to abandon its usual pre-Christmas dividend for seven million members.

The UK's biggest mutual organisation told delegates at a meeting in Manchester on Saturday that £8m in half-year payments to members could not be justified in light of the near-collapse of its banking arm.

The full-year dividend, which last time amounted to more than £100m, is likely to go the same way after the group made a loss of £559m in the first six months of 2013. A final decision will be made early next year.

Chairman Len Wardle said at the group's half-year meeting: "Our decision not to pay an interim dividend was not one that was taken lightly. But it was viewed by the board as a necessary one, given the challenges facing the group at this time."

The Co-op has announced details of a separate rewards scheme that will see members offered 10% vouchers that can be saved and used as a cash equivalent in the group's 2,800 food stores before Christmas Eve.

If a Co-operative member spends £30 they will be given a voucher worth £3. Vouchers can be collected between 18 November and 15 December.
Chief executive Euan Sutherland said: "Technology now allows us to offer these more immediate rewards, which we are confident our members will appreciate in the run-up to festive period."

The Sunday Times said that a review of the Co-op's donations to the Labour party will form part of a strategy rethink being undertaken by Sutherland as he also attempts to reduce the group's £1.3bn debt pile.

He said in an interview with the Sunday Times: "Part of our strategy work, and we will come back with it next May, is to ask, where and how should the Co-op movement be contributing to local society and to community movements?"

He added: "Being a mutual is not an excuse for not making money. My intention is to make decent profit out of the Co-operative Group. What we then do with that profit is different."

The Co-op bank's rescue plan announced last week will see around 50 branches close and bond investors including US hedge funds given 70% of the business, leaving the parent Co-operative Group with a 30% stake.The controversial move comes after a £1.5bngap in finances was discovered following the purchase of the Britannia Building Society and abortive plans to buy hundreds of Lloyds branches.

The Co-op business also includes supermarkets, pharmacies and a chain of funeral parlours.

Article Source : http://www.guardian.co.uk
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Co-operative Bank's future ethical focus leads customers to look around

Co-operative Group says it is committed to preserving bank's policy, while former leader says ethical label no longer applies

Fears that the Co-operative Bank, now controlled by hedge funds, may drop its much-trumpeted ethical policy has prompted some of its 4.7m customers to consider seeking out alternative green and socially responsible financial institutions.

The wider Co-operative Group has said it remains committed to preserving the bank's ethical focus, but the former boss of the wider Co-op Group, Peter Marks, this week told MPs that in his opinion, the ethical label could not apply to the bank any more.

A glance at Twitter and the letters pages of newspapers indicates many customers feel the same way. Last night, an online campaign was launched to "save our bank" and make sure it "sticks to its principles". Using the website saveourbank.coop, the campaign is backed by Ethical Consumer magazine and is appealing to customers to hold fire on switching away. "Sign up to our campaign instead. Then, once we are in our thousands, let's see if they are prepared to listen. We have two big aims: to protect the values and ethics of the bank, and – in time – to help it return to mutual ownership," it states.

Those determined to leave the Co-op Bank, but who do not want to give their money to one of the big four banks, may be pleased to discover there are other ethical options available. However, ethical finance experts pointed out that a lot depends on an individual's personal priorities and areas of concern. One person's absolute no-no issue is another's shrug of the shoulders, which is one of the reasons why it is impossible to provide one-size-fits-all recommendations.

The website of banking campaign group Move Your Money UK gives all the main banks and building societies a "switch score" out of 100 based on assessments of their honesty, customer service, culture, impact on the economy and ethics.

These five categories take in everything from customer satisfaction levels and the number of PPI mis-selling cases to the proportion of women on the board and the use of tax havens. The information used to determine the scores was compiled three months ago by Ethical Consumer.

For current accounts, the top-scoring institution is Carlisle-based Cumberland building society. However, its current accounts are only available to those living within its branch operating area, which rules most people out.

In joint second place is a bank that most people have probably never heard of: Reliance Bank, originally known as the Salvation Army Bank. Reliance offers a range of products including a fee-free current account that comes with a Visa debit card, cheque book and paying-in book, and offers all the usual facilities – online and phone banking, the ability to set up direct debits and standing orders, monthly statements and so on. But the "Sally Army" connection will not be to everyone's taste. The bank says: "Our investments are made within strict ethical boundaries, and our profits are used to further the Salvation Army's evangelical and charitable work."

Building societies such as Nationwide and the Coventry feature heavily in the Move Your Money list, as does Metro Bank – a relatively new arrival with branches in the London and M25 area; Handelsbanken, the UK arm of the Swedish bank of the same name, and the Islamic Bank of Britain, which calls itself the UK's only wholly sharia compliant retail bank but is keen to strees it is "an inclusive, ethical organisation, and welcomes customers of all faiths".

For those looking for a new home for their savings, the choice is wider, as there are several ethical institutions that don't offer current accounts but do have a choice of savings accounts. In the savings category, Ecology building society took Move Your Money's top spot with a score of 100 out of 100. Based in Keighley, West Yorkshire, the society uses the money put into its savings accounts to offer sustainable mortgages for properties and projects that respect the environment – but because the society has in recent months been inundated with people looking to move their money to a more ethical institution, there is now only one account open to non-member individual savers: Foundations Share, paying 1%.

Meanwhile, Charity Bank lends only to charities, social enterprises and community organisations. It closed its ethical cash Isa to new customers in April 2013 "due to unprecedented levels of new savings," but has other accounts, including one aimed at under-16s which pays 2%.

As things currently stand, the Co-op Bank is still the only high street bank with a clearly articulated ethical policy covering a range of issues, from human rights and the arms trade to genetic modification and animal welfare. Euan Sutherland, the boss of the Co-operative Group, which spans supermarkets, grocers and funeral homes, insisted that the ethical stance will be more ingrained in the bank than in the past.

"This bank will remain the Co-operative Bank. We are embedding the Co-operative principals in the constitution of the bank to guarantee this," he said.

The formal ethical policy was first launched in 1992 and it is signed by the bank's values and principles committee, chaired by a Co-operative Group board member, Herbert Daybell, a retired publisher.

As a result of the policy, the bank turns away £100m of business a year – a test of its ethical stance in the future perhaps.

Article Source : http://www.guardian.co.uk

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Co-op Group loses majority control of banking division

Co-operative Group will now control 30% of the bank's equity, less than the 75% proposed in the original rescue plan

American hedge funds have forced the Co-operative Group to relinquish control of its banking arm in a deal that raises concerns about its ethical approach to business for 4.7 million customers.

After months of intense talks with two US hedge funds, the UK's largest mutual – and owner of pharmacies, grocers and funeral homes – was forced to cede majority control in the bank as it battles to plug a £1.5bn capital shortfall.

The latest twist in the attempts by the Co-op to stave off nationalisation of the bank means that the group, formed by the Rochdale Pioneers in 1844, will be left with a 30% stake when the bank is floated on the stock market rather than the 75% it had originally hoped for when the rescue deal was first announced in June.

The Unite union's national officer, Dominic Hook, said the inability of the mutual to keep control of the bank was "a tragic day for the UK". He added: "This is dreadful for the staff, customers and the wider banking industry. This may mean customers will have even less choice on the high street and means we will have yet another finance company seeking shareholder returns over better banking."

The loss-making bank was forced to admit it had incurred another £105m of losses caused by mis-selling products including payment protection insurance.

Euan Sutherland, the former boss of the retailer B&Q who became chief executive of the Co-op in May, said the renegotiated deal was a good one for the group and its bondholders even though it had forced the group to redraw its original plan. "This is the first bank to be rescued and to survive as a standalone entity without taxpayer money," Sutherland said.

But the dramatic change in the ownership of the bank, which is likely to take place later this year, led to concerns about cultural change in the bank, its future approach to its ethical stance and the job prospects of its 10,000 staff. It is also a blow to the government, which had been hoping mutuals would create vast new challenger banks on the high street.

Co-op Bank had spent a year negotiating to buy 631 branches from Lloyds Banking Group before abandoning the ambitious scheme in April when its problems began to emerge.

Sutherland's predecessor, the Co-op veteran Peter Marks, who led the proposed takeover of the Lloyds branches, will face questions from the Treasury select committee of MPs about when he knew about the losses in the bank.

Many disgruntled customers of the bank took to Twitter, one saying: "Closing my account tonight after 23 years run by members for members you have let us down." Another said: "I think I'd rather you'd have taken taxpayers money than to sell out to Corporate Vultures!"

The hedge funds that have scuppered the Co-op's original plans are known for their activism at troubled companies. Aurelius Capital Management, best known for forcing Argentina to pay out on its debts, and Silver Point Capital, linked to distressed groups such as Lehman, are thought to have amassed their stakes in the bank's bonds after it was downgraded to junk in May.

They had been fighting for a bigger a stake in the bank and in convincing the Co-op to reduce the group's stake to 30% they are also taking bigger losses on their bonds. The bondholders are now expected to put £1bn into the bank – compared with £500m previously – while the Co-op will now inject less than the £1bn it had originally been stumping up to prop up the bank.

Led by Mark Brodsky, Aurelius has been involved in debt restructurings as diverse as port owner Dubai World and the US publisher Tribune, owner of the Los Angeles Times.

Silver Point Capital is run by two former Goldman Sachs employees, Edward Mulé and Robert O'Shea, and has a wide range of investments covering broadcasting – it bought two US TV stations out of bankruptcy – as well as car-makers and financial services and was involved in the bankruptcy of Hostess, the US food company best known for its Twinkies cakes.

The Co-op Group is thought to be ready to make a concession to 15,000 private investors – who were "very elderly and vulnerable", it had been warned. It is expected to swap their bonds for new ones that continue to pay them regular income streams rather than handing them shares. Trading in bonds has been temporarily suspended.

The precise details, which are still being hammered out, are likely to be revealed in the coming days. Sutherland said customers should not be concerned about the changing structure of ownership. The Co-op Bank has been a plc for some time but it is fully-owned by the mutual group which is now relinquishing total control.

For the first time Sutherland said the bank's ethical approach would be embedded in its articles of association. "This bank will remain the Co-operative Bank. We are embedding the co-operative principles in the constitution of the bank to guarantee this," he said.

But Andre Spicer, professor of organisational behaviour at Cass Business School, doubted that the bank would maintain its ethical stance in the long term. "History suggests that once a mutual bank is privatised it drops the focus on doing good to focus on doing well for shareholders. Many ex-mutuals became some of the worst offenders in the lead-up to the financial crisis . The number of staff the Co-op employs is likely to drop as management search for efficiencies. Staff who remain are likely to find themselves loaded down with various restructuring efforts. Despite assurances by the new owners, the Co-op is likely to have a more commercially focused culture."

New management had been hired for the bank only as recently as Maywhen a former veteran of HSBC, Niall Booker, was appointed as chief executive. He is expected to stay as part of the deal. Richard Pym, the former boss of Alliance & Leicester and now the chairman of nationalised parts of Northern Rock and Bradford & Bingley, was also appointed as chairman for the Co-op Bank. The pair had been part of the independent committee set up by the Co-op Group to review the approach from the hedge funds.

While a deal has been hammered out in principle, the details will need to be voted on by bondholders. As part of the attempt to raise the £1.5bn ordered by the Bank of England, the Co-op asset management division has been sold off and the insurance arm is also on the block.

Article Source : http://www.guardian.co.uk

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Co-operative Bank reports £709m loss amid uncertainty over bad debts plan

Co-op boss says alternative to meeting regulatory requirements to cover £1.5bn shortfall is to put banking arm into administration

A thwarted attempt to become a major player in the banking industry earlier this year continued to haunt the Co-operative Group on Thursday as its bank reported a £709m loss and raised the prospect of a Northern Rock-style rescue if bondholders failed to back a £1.5bn restructuring bid.

The group, which has operations spanning funeral services to supermarkets, said there would be no quick fixes as directors conceded that shoring up the bank, which has 4.7 million customers, would involve job losses and significant restructuring of the wider group.

Richard Pym, the bank chairman, said that without new capital the banking unit "will not be a going concern".

The Co-op group's new chief executive, Euan Sutherland, said there was no plan B. The only alternative to meeting regulatory requirements to fill a £1.5bn shortfall in the bank's reserves would be a government takeover similar to the bailout of Northern Rock in 2008. Sutherland reported that losses at the bank of £709m sent the wider group into a £559m loss, compared with £18m of profits in the first half of 2012.

He blamed £496m of previously undiscovered bad debts and a £150m write-off on IT systems for the deterioration in the bank's financial situation. "It's inevitable in a restructuring of this size that there will be some jobs at risk," he said, predicting that the bank would be diminished from its current scale of 10,000 staff and 320 branches.

Sutherland said a new management team would devise a turnaround strategy with the management consultancy Oliver Wyman. Sutherland indicated that executives would receive bonuses next year despite the group's travails, saying that a remuneration plan will be announced in March that will reflect the need to retain experienced senior staff.

The Co-op's plunge into loss follows a difficult year that started with an audacious bid by its bank to buy 632 branches from Lloyds Banking Group and ended with the banking regulator insisting it abandon the deal and find £1.5bn to cover previously undisclosed bad loans.

The debacle stems from the Co-op bank's purchase of the Britannia building society in 2009, which had joined several other banks in making indiscriminate loans to corporate customers, many involved in overvalued commercial property deals.

Sutherland said the Co-op bank's bad loans were mostly accounted for by Britannia, with half of all its poorly performing retail loans and three quarters of its roughly £440m corporate bad debts blamed on over-zealous loan agreements sold by the building society.

The Prudential Regulation Authority (PRA), the City regulator, said on Thursday that the scale of the losses did not alter its demand that the Co-op plug the £1.5bn hole in its balance sheet.

A rescue of the bank has the support of the Co-op's board, which is made up of 20 non-executive directors, 15 of whom are elected from regional boards and five from Independent Co-operative Societies. Sutherland said the board had considered all the options and agreed to commit £1bn of the Co-op group's funds to cover bad debts in return for a debt for equity swap by bondholders.

Bondholders ranging from pensioners to hedge funds will have to take a loss on their investment under plans for a "bail-in" in coming months.

They will be forced to contribute £500m through an "exchange offer", which will result in a stock market listing for the bank. Some 15,000 holders of Co-operative Bank bonds have written to the Bank of England's financial policy committee seeking an intervention in rescue of the bank.

Mark Taber, representing retail bondholders who believe they should be spared a haircut on their investments, said there was a "disgraceful" lack of detail in the Co-op's offer. He said: "The PRA should not allow this and should make a direction to the Co-op Bank [to alter the restructuring] accordingly."

While the Co-op's board has agreed the deal, there is likely to be much debate inside Britain's largest mutual organisation about the cost of the rescue, the prospect of running a business with a large number of shares owned by non-mutual institutions and the potential for another banking crash to wreck the wider Co-operative Group.

Sutherland, who replaced Peter Marks in May, said: "We are sorry but we are a new team and grasping the nettle and getting on with fixing the situation."

If a rescue fails

Should the Co-op fail to secure a rescue of its banking division it will fall to the government to step in.

There are several options for ministers and which one they choose will depend on the state of the Manchester-based bank.

A Northern Rock-style takeover would be the most draconian. The government purchased all the Rock's shares and made it a wholly-owned state enterprise.

A bailout of the bank would involve a large injection of cash to cover bad loans in return for partial ownership. The state owns 83% of Royal Bank of Scotland and 39% of Lloyds. In the case of Lloyds, following a £20.6bn injection of funds.

Another option was pursued in the case of Dunfermline building society, which like the Britannia building society began offering loans on risky property deals at the height of the housing boom.

Dunfermline, which was unable to raise extra funds from its members to cover bad debts, was absorbed into the Bank of England on a Friday and transferred on the following Monday to the Nationwide.

In each case the first £100,000 of individual savings are protected.

New tougher rules agreed in Brussels are due to take effect later this year, though no date has yet been set. The Recovery and Resolution Directive will force investors that lend to banks to sacrifice some of their assets as part of any rescue plan. It will also force banks to offload profitable divisions to cover losses under a so-called "living will".

The Co-op has in effect adopted the strategy put forward in the directive before it has become law, telling bondholders to sacrifice around a third of their holdings to pay a third of the £1.5bn bailout package. The Co-op group will also sell its insurance arm.

Article Source : http://www.guardian.co.uk

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Co-operative Bank rescue deal 'could result in nationalisation'

Bondholders accuse the City regulator of taking a punitive and arbitrary approach to firm's capital requirements

The Co-operative Bank's £1.5bn rescue package faced sharp criticism on Tuesday from bondholders who are accusing the City regulator of taking a punitive and arbitrary approach to the Manchester-based bank's capital requirements.

Bondholders facing losses have written to Andrew Bailey, the chief executive of the Prudential Regulation Authority (PRA), to warn that the bank could face nationalisation as result of the demands to raise fresh capital. They are also concerned about the damage being caused to the wider Co-operative Group, which includes pharmacies, funeral homes and grocers, and allege that a false market was created in the bank's bonds by the failure to disclose that the bank has needed to find extra capital since 2011.

Mark Taber, who fought a campaign against Bank of Ireland on behalf on bondholders, said 1,300 holders of Co-op bonds had contacted him after learning they were required to take losses to help find the extra capital. "Not only are the PRA's actions causing great distress, they also threaten to cause an avoidable standoff which could result in unnecessary nationalisation of the bank and massive damage to the Co-operative Group and mutual sector," Taber said in the letter copied to the new Bank of England governor Mark Carney and chancellor George Osborne.

£1bn is being put up by the Co-op group to prop up its bank after demands were made to raise fresh capital.The Co-op needs the support of bondholders for its plan to raise the extra capital. Co-op group is putting up £1bn to prop up the bank and bondholders will receive shares. The bank, currently a plc wholly-owned by the mutual group, will be listed on the stock exchange for the first time.

The Co-op took issue with an assertion by Tabor that the traditional hierarchy of capital structures was being ignored by requiring bondholders to take a loss before the shareholders were wiped out. The Co-op group insisted that its shareholding in the bank was being wiped out. "The group is therefore fully respecting the current capital hierarchy," Co-op said.

Many of the Co-op's bad loan losses stem from its takeover of Britannia Building Society in 2009 and Taber said the PRA's predecessor, the Financial Services Authority, had approved this deal.

Taber noted that Bailey had told the Treasury select committee that there gulators had known of the Co-op's capital position since 2011 but that this was never disclosed. He took issue with the government endorsing the now aborted deal to take over 631 Lloyds Banking Group group branches as a "virtuous model" for banks.

Taber also accused the PRA, which would not comment beyond acknowledging receipt the letter, of setting an "arbitrary" capital ratio, although the additional capital is thought to be needed to cover yet-to-be-revealed losses on loans. The Co-op Bank will reveal more about the terms of the so-called "bail-in" of bondholders after its results next month.

In a speech to the insurance industry on Tuesday, Bailey warned that insurers could be required to hold additional "add ons" of capital. The PRA is using what Bailey described as an early warning system to establish if the insurers will need to hold extra capital.

Article Source : http://www.guardian.co.uk
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