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financial
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- Profit before taxation
- Cost/Income ratio
- Return on equity
Maintain the continued growth in profits and the reductions in the cost/income ratio as envisaged in the bank's Strategic
Plan 2001-2003, whilst at the same time adhering to the culture and the principles of 'co-operation'.
TARGET ACHIEVED 
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performance
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The Co-operative Bank plc |
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MBBG: Major British Banking Group |
| (Source: Financial Control 2002) |
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commentary
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Financial results In 2001, The Co-operative Bank recorded a
profit before tax of £107.5 million, £11.2 million (11.6%) higher
than 2000. Earnings attributable to the equity shareholder,
after tax, were £68.5 million, a rise of 15.7%, and the return on
opening equity, after tax, was 21.1%, a reduction of
1.2 percentage points  (cf. Major British Banking Group
average of 15.5%). The increase in profitability arose from
operating profits, before bad debts, up by 11.3%, reflecting a
6.2% rise in operating income and a further improvement of
1.7 percentage points in the cost/income ratio. Credit quality
remained stable, and the charge for bad debts, which
increased by £6.3 million, was slightly better than last year, at
1.71% of loans and advances to customers. The balance
sheet remained strong throughout the year, with continuing
robust liquidity and capital ratios. The year-end risk asset ratio
was 13.7%, with a Tier I ratio of 9.9%, substantially higher than
the regulatory standards. At the year-end, balance sheet
liquidity was underpinned by £2.7 billion of highly-rated debt
securities.
In 2001, retail customer deposit and lending balances both
grew strongly. Average retail deposit balances of £4,887 million
increased by £935 million (24%) and were £1,344 million
higher than average retail lending balances which, at
£3,543 million, increased by £485 million (16%).
The growth in retail customer deposits was spread fairly evenly
across the personal and corporate sectors, with average
personal deposits growing by 28% and average corporate
deposits by 17%. Both the personal and corporate sectors
increased their retail lending, although growth was stronger in
the corporate sector, with an increase in average lending of
£357 million. In the personal sector, average lending increased
by £128 million. This had the effect of better balancing the
retail lending portfolio between the corporate and personal
sectors, and reflected both the successful focusing on specific
opportunities within the corporate sector, and the more
targeted marketing and tighter acceptance criteria within the
personal sector credit application and behavioural scoring
systems.
Cost/Income ratio Operating income of £455.6 million was
£26.6 million (6.2%) higher than last year, reflecting steady
growth in both net interest income and non-interest income.
Net interest income was £313.5 million, an increase of
£19.4 million (6.6%). The rise in net interest income was mainly
due to growth in customer balances, partly offset by a
reduction in the overall net interest margin. Although margins
for certain products have narrowed in line with industry trends,
the reduction in the overall margin mainly arose from mix
changes, where the growth in corporate lending and wholesale
asset balances was higher than in personal lending. The
bank's increase in wholesale assets mainly arose because
retail deposits overall grew faster than retail lending and these
incremental deposits were placed in the financial markets.
Corporate and wholesale lending attracts a lower margin than
unsecured personal lending because such lending generally
represents a lower credit risk. As a result of this improvement
in the credit profile, the bank's net interest spread (the
difference between interest rates paid on deposits and that
earned from loans) reduced by 0.2% to 3.7%. In addition, the
contribution from interest-free liabilities was reduced by 0.2%,
due to the lower interest rate environment. Hence, the overall
net interest margin was 4.4% compared with 4.8% last year.
Average interest-earning assets of £7,175 million increased by
£983 million (15.9%), reflecting growth in retail customer
lending of £485 million and an increase in wholesale market
placements of £498 million. Average interest-bearing liabilities
rose by £856 million (16.6%) to £6,001 million, driven by
growth in interest-bearing retail customer deposits of
£860 million. The increase in average interest-free balances
mainly arose from higher current account balances and the
bank's retained earnings.
Non-interest Income of £142.1 million was £7.2 million higher
than last year, an increase of 5.3%. Net commission and fee
income increased by £8.1 million (9.1%) mainly reflecting
higher inter-bank commission from the bank's expanded ATM
network, along with higher Visa commission and customer
service fees. Insurance commission income was slightly higher
than last year by £0.4 million. Other income was £1.3 million
lower than last year due to lower dealing income in 2001. Most
of the bank's income from its Treasury activities is included in
net interest income.
Operating costs of £281.9 million were £9.0 million higher than
last year, a rise of 3.3%. The increase in costs reflects business
development expenditure. The cost/income ratio improved to
61.9%, better than last year by 1.7 percentage points. Staff
costs were £3.9 million (3.5%) higher than last year, mainly
reflecting the annual pay award and staff profit share (senior
managers participate in an annual bonus scheme related to the
bank's performance each year and all other staff receive a
pro-rata share of 5% of pre-tax profits). Staff numbers have
remained stable, with additional staff in the smile and
mortgage service centres more than offset by staff reductions
in the rest of the bank. Other administrative and depreciation
costs increased by £5.1 million (3.2%) mainly reflecting
incremental expenditure on strategic business developments,
such as the extended ATM network, the new mortgage service
centre and enhancements to the bank's major payment
systems (including banking industry initiatives such as the
introduction of chip cards and new CHAPS systems).
Excluding this investment spending, core operating costs were
lower than last year.
Despite a significant growth in business, the operating costs of
smile, the internet banking service, were slightly lower than
last year. smile's customer base has grown impressively since
its launch two years ago and approximately 75% of its
customers are new to The Co-operative Bank group. Earlier in
the year, smile's internet operating system and content
management systems were completely re-designed to further
enhance customer service and internet response times. The
product range was also extended and smile now offers
insurance, travel, mortgages and a funds supermarket in
addition to its current and savings accounts, loans and credit
cards.
Bad and doubtful debts The profit and loss charge for bad
debts of £66.2 million was £6.3 million higher than last year
due to growth in customer lending balances. The bad debt
charge represented 1.71% of loans and advances to
customers, slightly lower than last year by 0.07%. Personal
sector bad debt charges of £61.1 million rose by only
£2.4 million (4.1%). During the last two years, credit criteria
have been progressively tightened and bad debt charges in
2001 have risen at a slower rate than lending balances.
The bank's corporate lending is largely to small and mediumsized
business enterprises and credit quality has remained
stable in recent years. Corporate sector bad debt charges
were £5.1 million, higher than in 2000 by £3.9 million.
However, last year's corporate bad debt charge of £1.2 million
was particularly low, representing a combination of low
provisions for new debt and high recoveries of previously
provided debt. The bank's problem loan portfolio has now
been reduced to minimal levels, and hence there are fewer
provisions to be released.
Despite the current uncertainties within the economy, and
record levels of consumer debt, there are no firm signs yet of a
significant deterioration in the credit climate. Interest rates,
unemployment and company failures remain low by historic
standards. Although unemployment increased, albeit slightly,
during the fourth quarter of 2001, this followed a long period of
steadily falling unemployment. Despite a manufacturing
slowdown and declining corporate profitability, there are no
firm indications of an increasing trend in business failures.
However, at a time when many of the major world economies
are experiencing an economic slowdown, the timing of
economic recovery in the UK is inevitably uncertain and the
credit climate is likely to be weaker in 2002 than in recent
years.
Summary In 2001, the bank continued to grow strongly,
despite increased competition. Profitability has risen, cost
efficiency has improved and an excellent return on capital has
been generated.
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new targets
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- Further improve the bank's profits.
- Maintain the reduction in the bank's cost/income ratio.
Mervyn Pedelty, Chief Executive
Mick Firth, Deputy Chief Executive
Ken Lewis, Executive Director
Sheila Macdonald, Executive Director
John Marper, Executive Director
Bob Head, Chief Executive, smile
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