Summary
2001 has been another good year for The Co-operative Bank. In last year's report, I emphasised our underlying principle that sustainable success is most likely to be achieved by those organisations taking the broadest view of their responsibilities. In 2001, our adherence to this principle continued to serve us well. The combination of customer focus, innovative products and quality service, supported by committed people, and operating within an accountable framework of social, ethical and environmental responsibility, is a powerful formula. It has also been a successful one, and I believe it will continue to serve us well in the future.

Financial Performance
In 2001, the bank produced a pre-tax profit of £107.5 million, an increase of 11.6% compared with 2000, and the eighth consecutive year of record profits. The return on opening equity, after tax, was 21.1%. Operating income increased by 6.2% and the cost/income ratio fell once again, despite significant business development expenditure. Average retail customer lending and deposit balances both grew significantly, by 16% and 24% respectively. Provisions for bad and doubtful debts, at 1.71% of loans and advances to customers, represent a reduction in percentage terms compared with 2000.

People
Last year, I began my overview, perhaps somewhat unusually, by focusing on the bank's staff, who I referred to as a key reason for our success. This year, I am doing exactly the same, and make no apology for that at all.

All the points relating to our staff I made in last year's report remain equally important this year, in some cases even more so, and this is likely to be the pattern in future years as well.

The major programme we began in 2000 to review and improve our whole range of 'people policies' becomes more vital as every year goes by. Real improvement in this area does not come quickly or easily - particularly when starting from a position of some strength. It requires long term and sustained commitment.

I am therefore delighted to be able to say that, 18 months into the programme, we have made significant achievements in the priority areas we identified for action first. We have addressed, for example, role models of behaviour and leadership; development of talent; the definition and measurement of performance, underpinned by 'self service' technology and information, to provide each individual with a real insight into his or her own performance; and the linkages between performance and reward.

The success of these 'people policies' is, I am sure, a major reason why, by flexibly adapting our resources, we have been able to respond so readily to the many operational changes that are necessary to meet the business demands of the 21st century.

I am also certain it is not by coincidence that we have retained, for a second year, our listing in the Sunday Times' "Best Companies to Work For". This is compiled on the basis of a thorough and independent assessment, including a random and confidential survey of employees' views of their employer.

Having carried out our own survey of staff attitudes in mid-2000, before we embarked on our new programme, we repeated it in November 2001 in order to assess what changes there had been. I found it an encouraging start that, not only had the overall rate of response increased by several percentage points but also that, of the nine survey categories, the results had improved significantly in four of them, improved marginally in three, with the other two remaining level.

Customer Service
Of course, the belief in our staff and our investment in their development is a key element in our ultimate focus of serving our customers. Since last year's report, I have been asked several times who I put first - staff or customers. I always reply that I do not need to choose between them; the important thing is that our staff put our customers first. Particularly in the current climate of intense competition and increasing regulation, anything less than the total commitment to and focus on our customers as individuals would be a recipe for failure. We have no higher priority than providing our customers with the services and products they need, in a manner that matches or exceeds what they expect of us.

In a major independent survey of customers' satisfaction with their banks, carried out by MORI in December 2001, we were one of only two banks where over 70% of customers expressed themselves as 'very satisfied' with their current account. The next highest figure was 62%, and the average for all banks was 48%. These findings match our own in-depth service benchmarking against competitors, which is commissioned by us but carried out by independent research firms.

We are still the only bank to provide customers with service level guarantees, covering their routine banking activities. If we fail on any of these, we both apologise to customers and give them £15 in compensation - and we do it without quibble and often without being asked.

We know that different customers - both personal and corporate - have differing preferences as to how they wish to do business with us, and we therefore provide a full range of channels which enable them to do so - anytime, anywhere and at their choice.

Personal Banking
We know that our personal customers need a comprehensive range of products to choose from in order to meet their individual circumstances. In 2001, we have again been active in trying to make sure that we can provide many of these. For example, during the year we introduced two 'best buy' VISA Platinum credit cards; one with a fixed rate of 9.8% APR guaranteed for 5 years, and designed to take the uncertainty out of credit card rates for those customers who value that; the other at a competitive variable rate of 13.9% p.a. with a six month introductory rate of 0% p.a., particularly suited to those customers with short term borrowing needs. Both also have the expected Platinum Card benefits, and both have been very successful.

We also launched a new type of current account, Privilege which, for a small monthly fee, provides a guaranteed overdraft at preferential rates, together with free comprehensive annual family travel insurance and a wide range of other lifestyle products and services at discounted prices.

Following our re-entry into the mortgage market in late 2000, our core mortgage product, which combines a competitive rate, an initial six month discount and flexible repayment options, plus environmental benefits, has proved very popular. During 2001, we began to expand our mortgage product range with the addition of fixed and capped rate mortgages. We also expanded the channels through which they are available, which now include telephone, the internet, our branches and selected intermediaries.

At the end of the financial year, we introduced a 5-year Stock Market deposit bond, the first ever to be linked to the FTSE4Good Index of leading UK companies which meet FTSE's requirements on corporate social responsibility. It provides depositors with a return of up to 66% over 5 years, with no capital risk, and early indications are that it has also been enthusiastically received.

Independent Financial Advice
For those of our customers with larger or broader investment requirements, our IFA subsidiary, Co-operative Bank Financial Advisers Ltd (CBFA), provides independent investment advice. Last year, I was able to report that CBFA had won a prestigious "Best Independent Financial Adviser" award. This year, I am equally delighted to be able to say that CBFA has recently received the Department for Education and Skills supported UK National Training Award, in recognition of its innovative behavioural skills programme.

Internet Banking
The internet has brought about significant changes to the 'customer-business' interface in many areas, and certainly in banking. Following the launch in October 1999 of our Internet Bank smile, and its remarkable success since that time, our main priority for 2001 was to both consolidate and grow its customer base, as well as maintaining its high level of service and industry-leading position. I am pleased to be able to report that, in contrast to some of the internet banks launched subsequently, these objectives have been successfully achieved.

In addition, smile has developed and introduced through its website various third party financial service offerings, such as a funds supermarket, holiday and flight reservations and car insurance, the latter two being provided by sister businesses within the Co-operative Group.

In the statistics produced by Presswatch, the independent press monitoring service which measures both the quantity and the quality of press coverage, smile was ranked fifth out of a total of some 3,000 companies in 2000. This was a very pleasing outcome but, in the event, smile improved its ranking in 2001 to come third.

There are, of course, many customers, both personal and corporate, who do not want to exclusively use an internet bank, but who do want to use the internet, as and when they wish, but alongside the various other traditional banking channels. We recognise this, and also provide a free internet-based service for Co-operative Bank customers. At the 2001 Guardian/Observer Consumer Finance Awards, we were judged, among the 'traditional' banks, to have the Best Financial Services Internet Site.

Corporate and Business Banking
Corporate and Business banking had another very good year in 2001 with customer lending and deposit balances growing by 28% and 17% respectively. New facilities included a substantial financing arrangement for Manchester Airport, and participation in major syndications for several high quality national companies. To assist small and medium-sized companies, the bank extended its Business Banking team and, under the 'Clarity' concept of openness, trustworthiness and value for money, re-aligned its business banking facilities, working in partnership with several trade associations.

Of particular note, also, were achievements in those sectors with which the bank has developed a particular affinity. For example, during 2001, the bank gained the business of 8 further Local Authority customers and, for the first time, we are now banker to all 10 Local Authorities within Greater Manchester.

The bank has been similarly successful in the charities sector, where we are now banker to some of the leading names, including the well known international charity WWF. We also sought new opportunities for our affinity credit card business and I am delighted to report that, in 2001, we launched new card schemes with Barnardo's and ActionAid, as well as extending our long-standing relationship with RSPB, our largest affinity card partner.

In November 2001, we were welcomed by HRH the Princess Royal as an associate corporate member of Save the Children, in recognition of the funds raised through their card.

Our commitment to the charities sector, and the quality of the banking services we offer them, were recognised in September 2001 by the accolade "Charity Bank of the Year", awarded by the Charity Times.

The Co-operative Movement
In many respects, our place within the Co-operative family brings cohesion to our products, services, community involvement and brand values. 2001 was a milestone year for the UK Co-operative movement. After extensive consultation, the new Co-operative Commission published its findings and recommendations in early 2001, which were endorsed at a special Co-operative Congress in November 2001. There is now an agreed and forward-looking strategy for the movement, designed to underpin its future success.

Against this background, The Co-operative Bank's shared endeavours with other parts of the Co-operative Group and the wider movement continued to prosper during 2001.

The programme to install a network of cash machines in the stores of 20 retail Co-operative Societies proceeded apace, with 650 machines in place by the end of the year and more being installed throughout 2002. A new Co-op VISA credit card, specifically tailored for Co-operative Group non-food retail customers, was launched in the autumn of 2001, and is planned to be extended to food customers during 2002. Other initiatives with Co-op retail stores, including Co-op Cash Mini ISA's and Co-op Savings products, also continued to develop well alongside even closer collaboration with our sister businesses CIS and Travelcare.

Ethics
2002 marks the tenth anniversary of our ethical policy. Its introduction proved to be an important decision when, in the context of our co-operative values, we sought the views of our customers on a range of ethical issues. In the early 1990's, this was thought by many to be an unusual thing for any organisation to seek to do, and particularly so for a bank. However, the enthusiastic and concerned response of our customers provided us with a clear mandate to publish our original ethical policy in May 1992 - a public commitment on who we would, and would not, do business with.

Although considered at the time to be high risk by many commentators, it did in fact give the bank a distinct and co-operative difference within a crowded financial services marketplace, where genuine differentiation of an individual organisation is difficult to achieve and sustain.

Consumers' ethical concerns are not necessarily constant, however, and therefore we have at intervals since then been back to our customers, to ensure that our ethical policy is up to date and in line with our customers' developing views, and have updated it accordingly.

The fourth such customer consultation, which for the first time has also used web-based and branch-based 'polling stations' as well as postal questionnaires, was recently completed, and the results will be announced shortly to commemorate the policy's original publication in May 1992. Our ethical policy review process was recently acknowledged in the IPPR/Guardian awards as a leading example of public involvement.

We know that the adoption of, and ongoing commitment to, our ethical policy has worked in favour of our business performance, rather than against it. For example, our customers tell us that our ethical policy, more than any other single factor, was the main reason they chose to join The Co-operative Bank.

In the last couple of years, we have felt confident enough to try and identify the positive impact on our business of our ethical policy in financial terms, and include this analysis in our annual Partnership Report. It was pleasing to see this Report publicly recognised, when it was judged the foremost sustainability report of 2001 by the Institute of Social and Ethical Accountability and the Association of Chartered Certified Accountants. Such is our belief in the positive business impact of the convergence of our customer focus and ethical policy that, during 2001, we adopted the phrase "customer led, ethically guided" as the headline for our advertising and product promotional material.

Perhaps it was not so surprising that, when FTSE was proposing to establish a new index of leading companies selected on the basis of their good record on corporate social responsibility (FTSE4Good), The Co-operative Bank was asked to help with its planning, development and launch.

The FTSE4Good indices were launched in July 2001, with selection criteria including environmental sustainability, commitment to universal human rights and positive relationships with stakeholders. I was privileged to have been invited to be the first Chair of the FTSE4Good Advisory Committee. As I mentioned earlier, the bank has recently launched its first guaranteed deposit bond linked to the performance of the new FTSE4Good UK Index.

Environment
Our customer consultation over the last few years has revealed that, alongside ethical issues, our customers are also increasingly expressing environmental concerns. As a result, we have taken on board these separate, but sometimes overlapping, concerns, and incorporated them into our way of doing business.

For example, for every home purchase made with a Co-operative Bank mortgage, we provide a free home energy survey to identify how the home can be made more energy efficient, producing both financial and environmental benefits. And, for the life of every mortgage, the bank makes an annual donation to Climate Care, an international scheme that helps to tackle global warming.

As with ethical issues, the various environmental measures the bank has taken have also been reflected in our Partnership Report, as a result of which it has been judged joint-winner of the 2001 UK Environmental Reporting Awards by the Association of Chartered Certified Accountants.

In addition, our own programme to play our part in addressing the problems of global climate change - for example by reducing our energy consumption and switching to renewable energy sources - was named as winner of the 2001 Awards for Business Commitment to the Environment.

Finally
Looking forward to 2002 and beyond, there is little doubt that the economic prospects for both the UK and other major economies are less certain than they have been for several years. In the UK retail financial services industry, competition is expected to remain intense, partially fuelled by welcome changes in the regulatory environment aimed at making financial products more transparent and easier for consumers to compare.

Despite the uncertainties, I believe that our clear customer mandate, our Co-operative values, our commitment to service and the effective use of modern technology, and the wholehearted commitment of our most important asset - our staff - will continue to ensure that we compete effectively and can look forward to the future with confidence.

In concluding this overview, I would like to mention an award in 2001 which gave us all at The Co-operative Bank a particular feeling of pride, and which perhaps succinctly reflects the all-round balance of performance we strive to achieve. This was our designation as 'Company of the Year 2001', at the Business in the Community Annual Awards for Excellence.