Whilst reflecting on another very good year, we outline our plans and priorities, to strengthen still further our unique positioning in the market place.

1997 was undoubtedly another year of considerable achievement. The excellent results are naturally very satisfying, but 1997 was also particularly important because it was the bank's 125th anniversary. The year was also marked by the hostile take-over manoeuvres for our parent company, Co-operative Wholesale Society (CWS). At The Co-operative Bank, we are delighted that CWS repelled so effectively such an audacious and opportunistic assault on our principles and on the value entrusted to us by generations of co-operators and members.

I would also like to take this opportunity to pay tribute to my predecessor, Terry Thomas, who guided the bank's renaissance over many years. 1997's very good results are a fitting tribute to his leadership. I am delighted that Terry's considerable achievements in so many areas, including his substantial contribution to the North West as well as to the bank, have been recognised by the award to him, firstly, of the CBE and then through his subsequent elevation to the Peerage as Lord Thomas of Macclesfield.

[ Financial Performance ]
For the fourth consecutive year, the bank has achieved record profits. In 1997, these profits were £55 million before tax, which is an increase of 21% (£9.5 million) on 1996. Equally importantly, the profits after tax attributable to our equity shareholder represented an after-tax Return on Shareholders' Funds of 23%. This is an excellent performance by any standard. The factors behind the bank's 1997 profits growth included strong growth in both deposit and lending balances. Interest margins were maintained, and bad debts rates overall remained stable. Costs also increased, but much of this was accounted for by the one-off costs incurred to ensure that the bank's IT systems and other equipment will be "Year 2000" compliant as well as dealing with the brand new challenges of EMU and the Euro in both our retail and wholesale operations.

[ Key Successes ]
With so many successes to choose from over the last year, I would like to focus briefly on a few achievements which I hope will illustrate particularly well how the bank continues to set itself apart as a special business in what is an ever more competitive environment.

Our commitment to providing the most convenient service channels for our customers was demonstrated by our link-up with Post Office Counters, which enables our personal current account customers to make deposits and cash cheques free of charge at 15,500 Post Offices in England and Wales. This new service extends still further the bank's "anytime, anywhere" banking concept which already included, in addition to the branch network, a 24-hour telephone banking service, innovations such as the Sky TV teletext service and Vodafone messaging service for customers to view their accounts, access to the largest ATM network in the UK, and on-line PC access for business customers via our Financial Director service. We also maintained our leadership in the field of electronic banking when, in March 1998, we became the first major bank to offer a full on-line Internet service to our personal customers, at no extra cost. This enables our personal current account and Visa card customers to carry outall their routine banking - from viewing balances and statements and transferring funds between accounts to changing standing orders and paying bills - direct from their PC. This is a further major extension to our strategy of "anytime, anywhere" banking and customer choice. Among those taking advantage of these new facilities will be nearly 100,000 new current account customers whom we were delighted to welcome into the bank from the Britannia Building Society when it took the decision to withdraw from providing a personal current account. Many products performed well, an outstanding example being Business Direct, our low cost direct banking package for smaller businesses that don't need to borrow, which showed a remarkable year on year growth of over 200% in 1997. Our Visa Advantage Visa card remains the best buy in the marketplace, offering the lowest long term interest rate of all the Visa card providers. And, among our expanding range of affinity cards, we are particularly proud of our new Greenpeace card, launched in May 1997. Made from an innovative new biodegradable plastic called Biopol, the card was the product of a challenging three year development period in which numerous technical difficulties had to be overcome. The tremendous customer response to the card has fully justified the hard work that went into its development.

I am also pleased to report that our personal current account was also singled out as a "Best Buy" by a leading consumer magazine, the latest in a long line of accolades. Turning to the bank's commitment to playing a positive role in the community and society at large, we more than matched the high standards we have set in recent years. Our staff and customers raised over £1 million for the Macmillan Cancer Relief Fund. This money was used to recruit, train and fund more Macmillan nurses, who provide specialist care for cancer sufferers and their families. And our innovative Customers Who Care scheme continued to go from strength to strength. Focusing on a different key issue each quarter - most recently, disability, biodiversity and human rights - we worked with charities and expert organisations in each sector to raise awareness, while enabling all our personal Visa cardholders to vote on how the funds raised through our initiatives should be allocated. To mark our 125th anniversary in an appropriately enduring manner, the bank announced plans to establish four community woodlands around our local neighbourhood of Greater Manchester. We were also very pleased to receive the Corporate Conscience Award for Global Ethics from the Council on Economic Priorities, a highly respected American body dedicated to evaluating and encouraging good corporate citizenship worldwide.

Perhaps most gratifying of all in 1997 was the response of our customers to the announcement of our new Partnership Approach. Asked for their views, almost 100,000 took part in our Partnership Ballot, the overwhelming majority expressing strong support for this crucial development in the way we run our business.

(For a detailed account of our first Partnership Report, please refer to our publication "the Partnership report - Seven Partners, a balanced view").

Mervyn Pedelty, Chief Executive (seated centre); from left to right -
Mick Firth, Michael Woodward, John Marper and Ken Lewis, Executive Directors

Naturally, since we regard our staff as Partners, investing in our people is a high priority for us. We place considerable emphasis on providing first class training, and real management development and progression opportunities, for all staff. We were therefore delighted to be the first clearing bank to achieve the "Investor in People" award across all operations. We were also honoured to win no less than two National Training Awards in 1997 for our training programmes. Of equal importance is our willingness to listen to the views of our staff, and to take these views into account in the way we run the business. We conducted a detailed Staff Survey in the Autumn of 1997, the results of which are being incorporated into our plans and processes. We also have a new internal communications programme, which equips all our line managers to regularly communicate the bank's performance, as well as the issues and opportunities facing the bank, to all staff, and encourages regular and constructive feedback from our staff to me and my Executive Team.

[ Looking Ahead ]
As the few highlights above demonstrate, 1997 was a marvellous year for the bank.

But there is no danger whatsoever of success making us complacent. On the contrary, we are keenly aware of the need to continue to strengthen our position against increased competition, as falling market entry costs make it easier for new players to cherry-pick some of our more important areas of business. Both retailers and insurance companies, as well as several European and American banks, are all beginning to make their presence felt in the UK retail financial services market.

In order to withstand these challenges, we will continue to build on our competitive strengths, the greatest of these being our distinctive ethical Brand positioning and our customer service. Over the past few years, the bank has worked hard to establish a positioning quite distinct from that of any competitor. Our Partnership Approach provides us with the basis to add still greater value to this enormous asset. Our first comprehensive Partnership Report demonstrates to any observer that there is real substance behind our claim to being the bank which is genuinely different. Another factor in our continued success will be our commitment to developing innovative new products and making the best possible use of new service delivery channels to ensure maximum customer choice. To this end, we are conducting a major review of the bank's IT infrastructure to ensure that we are able to respond quickly to new opportunities in the future, and to the changing needs of both existing and potential customers.

As already mentioned, we are investing heavily to ensure that all our computer systems, and those of all our key suppliers, are "Year 2000" compliant - safeguarding our service to customers against the threat posed by the so-called "millennium bug". Similarly, we are working to prepare the bank to deal efficiently with the opportunities and consequences of European Monetary Union. Whatever date is set for the UK's entry, many of our customers will want to start transacting business in Euros in 1999.

We are also building an even more mutually beneficial relationship with our shareholder, Co-operative Wholesale Society, and with the wider Co-operative Movement. We are currently reviewing business opportunities within CWS, and across the Movement, with a particular interest in developing "retailer financial services".

What else does the future hold for the bank? We are optimistic about the future. A highly successful Managers' Conference which I hosted in early 1998 outlined our plans and key priorities for 1998 and beyond to ensure the bank's continued success, underlining the importance of continuing to build on the solid foundations we have now established - and, above all, our commitment to strengthening still further our unique position in the market. I am impressed with the achievements of the last few years, but we have more to do and no shortage of either opportunities or competitors. As I enter my first full year as Chief Executive, I look forward to being part of an even more exciting and successful chapter in The Co-operative Bank's long history.