| Delivering Value |
| Shareholders |
In our annual Financial Statements we provide a full review of The Co-operative Bank's operating and financial performance. Below, we provide a summary and report on our financial performance during 1997.
[ Determining the shareholders' priorities and measuring the Bank's performance ]
The priorities of our sole equity shareholder, Co-operative Wholesale Society (CWS), are established annually at the General Meeting of the company, and regularly reappraised in light of current circumstances at periodic meetings of the Board of Directors. Performance is assessed not merely in terms of the return on capital employed, but also as an overall contribution to the aims and objectives of the CWS Group. In contrast, Preference Shareholders priorities are relatively straightforward, being confined to a fixed return on capital. Measurement of financial performance is reported on fully in the Bank's 1997 Financial Statements, which is audited by the accountants KPMG Audit Plc. The Financial Statements also include a report on the Directors' Statement on the company's compliance with relevant paragraphs of the Cadbury Code of Best Practice on Corporate Governance Matters.
[ Existing commitment ]
The Bank's Mission Statement commits it to "manage the business effectively and efficiently, attracting investment and maintaining sufficient surplus funds within the business to ensure the continued development of the Group".
[ Performance ]
In 1997, The Co-operative Bank achieved record profits for the fourth consecutive year.
Profit Before Tax of £55 million was £9.5 million (21%) higher than last year. Earnings attributable to the equity shareholder, after tax, were £30.7 million, an increase of 35%. The after-tax return on opening equity was 23.5%.
The increase in earnings arose from higher Operating Profits (before Bad Debts) which increased by £11.4 million (17%), fuelled by a solid rise in Operating Income. Credit quality remained stable and the charge for Bad Debts increased in line with the growth in Loan balances.
Telephone Banking facilities have continued to attract ever more customers and, during the year, nine million incoming telephone calls were received from both personal and corporate customers. The Bank's reputation for innovation will be reinforced in 1998 with its new Internet Banking Service.
Despite increased competition, Retail Savings and Loan balances continued to rise substantially and the Bank's Net Interest Margin improved slightly. Deposit balances continued to grow faster than Loans. Operating Income of £316 million was £29.5 million (10%) higher than last year. Most of the increase arose from Net Interest Income of £209 million which increased by £28.5 million (16%), driven by the growth in Loan and Deposit balances. The Bank's overall Net Interest Margin remained stable at 4.5% increasing slightly by 0.1% due to the contribution from Current Accounts. The interest spread (being the difference between the interest rate paid on Deposits and the interest earned on Loans) was in line with the previous year.
Non-Interest Income of £107 million was £1 million higher than last year. In 1996, Non-Recurring Income of £1.6 million arose from a subsidiary that was sold later in the year and from the re-purchase of the Bank's Subordinated Notes. Visa and Insurance Commission increased steadily. Other Fees and Commissions to personal customers also increased but Transmission Income was lower than that last year and incremental hedging Income was reduced as positions matured.
Credit quality remained stable in 1997. The charge for Bad Debts of £26.3 million was £2.6 million higher than last year, a rise of 11%, equivalent to the growth in Retail Lending. The Bad Debt charge represented 1.1% of Average Customer Lending which was in line with last year. Personal Sector charges were £25 million, an increase of £3.9 million (18%) due to the higher Loan balances. The Bad Debt charge represented 2.1% of the Average Balances, 0.1% better than last year. Provision rates remained much lower than industry norms, particularly in the case of Visa. Corporate Sector provisions were also at a low level. The charge for Bad Debts of £1.3 million was half of last year's charge and represented only 0.1% of the Loan Portfolio which mainly consists of small and medium size enterprises. The Bank operates a prudent provisioning policy and, in recent years, has benefited from write-backs of prior provisions as problem loans have been eventually resolved.
The low level of Bad Debt charges in recent years reflects several factors; the state of the UK economy, the improvements in credit cycle management and the improving quality of the customer base. Some increase in the provisioning rates are expected as the pace of economic growth declines and there are fewer large write-backs of prior years' provisions. Expenses of £237 million were £18.1 million (8%) higher than last year but this increase was £11.4 million less than the rise in Operating Income. The Bank has continued to develop its customer service facilities and its core technology systems whilst realising some early benefits from reorganising its Branch and Regional Network.
A comprehensive programme is well-advanced to test, enhance and replace systems ensuring they will not be impaired when the date changes on 1st January 2000. This extensive programme is being controlled by a dedicated Project Team. They will ensure computer hardware, software, peripherals and other equipment with embedded time systems, will be fully-operational in the new millennium. Key customers and suppliers are being advised and monitored to minimise the risk of third party failure. The incremental cost of the Year 2000 programme was £6 million in 1997, in addition to the Bank's re-deployment of internal resources. In 1998, the core programming work will be substantially completed and facilities for the new Single European Currency will also be developed.
Technology underpins most of the Bank's development programmes and, including Year 2000, systems developments and data centre costs increased by £10 million year-on-year. Developments in customer service facilities have resulted in lower costs of operating the Branch and Regional Network and higher expenditure within the Telephone Banking Centres. As a result of the rationalisation programme, Branch and Regional Network costs of £73 million have been reduced by £3 million. Bullion handling has been outsourced to another clearing bank and this will generate further savings in 1998. In 1997, the costs of the Telephone Banking Centres were £53 million, an increase of £7.4 million. Telephone calls have been increasing by approximately 20% a year. The Bank also incurred reorganisation expenses of £4 million, including severance costs of £2.1 million which were higher than last year by £0.9 million, but these were largely offset by lower premises rationalisation expenses in 1998.
[ Future objective ]
MERVYN PEDELTY Chief Executive
MICK FIRTH Executive Director
MICHAEL WOODWARD Executive Director
KEN LEWIS Executive Director
JOHN MARPER Executive Director
The Bank has established a defensible position in its chosen markets within the highly competitive UK market place. It has established a track record of solid business growth along with investment in new methods of banking practice and customer service delivery which will be its platform for the future.
| Our sole equity shareholder, Co-operative Wholesale Society (CWS), is as commited to the idea of social responsibility as is The Co-operative Bank. | |
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| Our sole equity shareholder, Co-operative Wholesale Society (CWS), is as commited to the idea of ecological sustainability as is The Co-operative Bank. | |
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