Summary
Once again, our commitment to running a responsive, and responsible, business has provided a firm foundation for success - making 2002 another record year for The Co-operative Bank. The year saw us building on our strong reputation for customer focus, ethical principles, innovative product development and quality service. These priorities have continued to be a powerful formula for sustainable growth.

Financial Performance
In 2002, the bank produced a pre-tax profit of £122.5 million. This is a 14% increase on 2001, giving us our ninth consecutive year of record profits. Against a backdrop of relentless competition and increasing economic uncertainty, our financial results continue to demonstrate that the emphasis we place on customer service and the broad view we take of our social responsibilities really does deliver. The return on opening equity, after tax, was 19.8%. Operating income increased by 6.1% and the Cost/Income Ratio was reduced again, despite our continued investment in business development. Average retail customer lending balances grew by 11% and average retail customer deposit balances by 12%. Provisions for bad and doubtful debts stood at 1.60% of year-end loans and advances to customers, a reduction in percentage terms of 0.11% compared with 2001.

Co-operative Financial Services
In April 2002, Co-operative Financial Services (CFS) was created to bring The Co-operative Bank and Co-operative Insurance Society (CIS) under common leadership. Co-operative Financial Services Limited is an Industrial and Provident Society and is the new holding company for these two major businesses.

Following my appointment as CFS' first Chief Executive, one of my key objectives has been to focus on the range of products, services and distribution channels offered to the customers of both organisations and to explore how these can be developed to provide our joint customer base with a more comprehensive, convenient and co-operative financial services offering. A significant amount of research and analysis was undertaken prior to the formation of CFS. One output from the research was that there is a large number of customers unaware that these two important cooperative businesses are part of the same family and, as a result, are buying many of their financial services products from outside the Co-operative Group. When customers are made aware that the bank and CIS are, in fact, sister organisations, many indicate a preference for considering buying these products from the sister organisation.

The formation of CFS has inevitably led to a reorganisation of the bank's Board and Executive Team. The new management structures are now virtually complete, including several key executive appointments, with my colleague Sheila Macdonald appointed to the role of Chief Operating Officer of the bank. I continue as the bank's Chief Executive.

People
I have always firmly believed that our people, and their commitment to exceptional levels of customer service, are crucial to the success of the bank. Therefore, given the various changes currently taking place within our organisation, I am particularly pleased by the feedback we received from our 2002 annual staff survey. The staff survey provides our people with the opportunity to openly air their thoughts and opinions on working for the bank. This year, I was pleased to see a significant increase in the number of our staff taking the opportunity to respond to the survey and I welcome, once again, the improvement that was recorded in the overall scores. Staff understanding of the bank's mission and core values remains high, and I am delighted to report that 88% indicated their support for this positioning. The fact that staff opinions about working for the bank constitute a major reason for our inclusion in the list of the 'UK's Best Workplaces 2003', published by the Financial Times, also gives me considerable personal satisfaction.

In the previous year's staff survey, along with clear positive signals about pride, job satisfaction, teamwork and empathy with customers, there were concerns expressed by some staff about the opportunities for career progression and about the increasing pressures at work. In 2002, we continued to focus on these areas through a number of initiatives. Our new 'work/life balance' policies include provision for flexible working, maternity, paternity and adoption leave, and childcare vouchers. These policies recognise the wider commitments of our staff and, in partnership with our new 'well-being' policy, are a key part of our drive to tackle the impact of modern stress in the workplace. The impact of these new policies has yet to be seen in responses to the staff survey, but I hope to see improvements in this area next year as more employees make use of these provisions.

Customer service
Just as we recognise the need to keep investing in our employees in a time of change, it is equally important that we maintain our sharp customer focus. Whilst I have always believed that looking after our staff is the starting point for excellent customer service, we also continue to implement a range of initiatives to help ensure we meet or exceed our customers' expectations.

Our recent TV advertising was built around the proposition that we are a bank that treats its customers with respect, and we aim to do this in all our dealings with them. It is extremely important to us to be honest and open with our customers, and to guarantee them good service. If we ever fail to live up to our service level guarantees, after rectifying the problem we apologise and give the customer £15.

A major independent survey, carried out by MORI in the six months ending December 2002, confirms the effectiveness of our approach. 97% of our current account customers described themselves as 'satisfied' or 'very satisfied' with the service they receive from us. This puts our net satisfaction rating 8 percentage points above the average rating and puts us at the top of the list of all the high street banks surveyed.

Personal banking
2002 was a particularly busy year for product development in personal banking as we worked hard to make sure our personal customers have not only the choice of products, but also the range of channels through which to access them to meet their evolving requirements. We expanded our residential mortgage product portfolio with the addition of several competitive fixed-rate offers, enabling our customers to benefit from current low interest rates. New variable-rate mortgages, including a 3-year discount product and a 5-year tracker product, were added to our mortgage range and we believe we now offer something for everyone. In keeping with our wider values and principles, our mortgages combine value for money with a range of environmentally-friendly features. For example, for each year during the lifetime of a mortgage, the bank will make a payment to Climate Care - a scheme that seeks to offset, each year, around a fifth of an average home's carbon dioxide emissions through reforestation programmes and other schemes.

We have also been particularly active in the credit card market, regularly featuring in the media's 'best buy' tables with products such as our Platinum Fixed Rate VISA card, which guarantees a fixed rate of interest for five years. Building on this success, in September 2002 we launched a Gold Fixed Rate card, which provides customers with a similar fixed rate offer until 2008. We also re-launched our Platinum Advantage card, with an initial interest-free period for purchases and balance transfers, and also introduced a Platinum Base Rate Tracker card, which we believe is unique in the credit card market - cardholders are guaranteed an interest rate that is fixed at 5% above the Bank of England base rate, with a six month introductory period where the rate is equivalent to the prevailing base rate.

We continued to build relationships with our affinity partners, notably through the introduction of a number of new platinum cards, which generate donations to the affinity group each time they are used by the cardholder. In total, the bank's affinity cards raised more than £1.38 million for partners during 2002, providing much needed funds for them, for a variety of important projects.

Since last year's launch of our new Privilege current account, we have seen many customers - both existing and new - choosing to take advantage of the benefits it offers. These include a guaranteed overdraft at preferential rates, free annual family travel insurance and discounts on a wide range of lifestyle products and services - all for a small monthly fee.

In addition to product development, we have also improved the way we communicate our offers to both existing and potential new personal customers. In 2002, we ran two TV advertising campaigns: one specifically promoting the advantages of our personal loans, and another, to which I referred earlier, reminding people of the bank's promises to customers about service, ethics and respect. All of our marketing activity continues to carry our overarching customer proposition: 'The Co-operative Bank. Customer led, ethically guided.'

Independent financial advice
Co-operative Bank Financial Advisers Ltd (CBFA), our IFA subsidiary, consolidated its position as a leading IFA when it was confirmed in the top 25 of the list of the UK's Top 100 IFAs, published by the industry trade journal, Financial Adviser.

In our annual survey of customers, they confirmed yet again that the three most important reasons for dealing with CBFA are: genuinely independent advice; our approach to ethical investments; and the reassurance that comes from being part of The Co-operative Bank. In 2002, CBFA became the first business in the UK to be awarded the joint Standard Life/Royal National Institute for the Blind (RNIB) 'See it Right' logo for its accessible website.

Internet banking
Within just three years of its launch, our internet bank, smile, has established a coveted and distinctive position in the market.

During 2002, we added a number of new services to the smile offer. For example, working in partnership with 'Self Trade', one of the UK's fastest growing online stockbrokers, we developed smileinvest sharedealing, a quick and easy low-cost way for customers to buy and sell shares, 24 hours a day, and a new smile credit card was also launched in July 2002, offering customers many 'best buy' features.

In July 2002, we were pleased to receive no fewer than five awards for smile. The specialist magazine, Your Money, chose smile as the Best Internet Banking Provider and at the Guardian/Observer Consumer Finance Awards we won four prizes for best: website, credit card, online current account and savings account. A successful year for smile drew to a pleasing conclusion when a leading consumer magazine survey singled out smile for its exceptional levels of customer satisfaction - some 80% of customers having said that they were very satisfied with all aspects of their smile banking service.

For Co-operative Bank customers who want to use the internet, but wish to do so alongside more traditional banking service channels, the bank also provides a free online facility, the Co-operative Bank Internet Banking Service. Last year, this service was judged the Best Financial Services Internet Site among the 'traditional banks' at the Guardian/Observer Consumer Finance Awards, and we have since improved the website even further to make it even more user-friendly.

Corporate and business banking
During 2002, we redefined relationship banking for our corporate and business customers as 'Partnership Banking'. This move reflects the surveyed views of our customers, who see The Co-operative Bank as an integral part of their business and a critical component of their success. We understand that each business is unique and, by working in partnership, we invest time in gaining a true understanding of our customers' own businesses, allowing us to tailor our support and respond to them with imagination.

Another key element of our corporate and business banking activities in 2002 was our focus on small to medium-sized businesses (SMEs). In October 2002, we relaunched our Business Direct account as 'Business Directplus' - a 24-hour telephone, internet and postal banking service offering 18 months free banking to all new SME customers, as well as competitive in-credit interest rates on current account balances.

The year also saw the development of a new partnership with Bradford & Bingley plc, who chose us as their principal clearing bank. Our innovative approach, flair and underlying values were key amongst the factors that resulted in Bradford & Bingley selecting The Co-operative Bank ahead of other competitors.

An existing partnership that has strengthened and developed over the last year is that between the European Investment Bank (EIB) and ourselves. In November 2001, the EIB Loan Scheme was created to help finance the growth of businesses in EU-assisted areas of the UK. In September 2002, we mutually lowered the minimum loan value from £250,000 to £100,000, to enable more of our SME customers to benefit.

At the same time, our growing profile within the Local Authority sector placed us in a strong position to participate in the Affordable Warmth Programme in partnership with Transco and EIB. We developed a new loan scheme, which is being used to assist local authorities and social housing landlords finance the installation of energy efficient heating systems, thus reducing energy costs and improving comfort levels for residents.

The Co-operative movement
Our co-operative heritage continues to inform and guide everything we do - it is reflected in our strategies and our products and services, in our community involvement programmes and in our brand values.

2002 saw a concerted effort to strengthen the relationship between the Co-operative movement and the growing UK social enterprise sector. The bank chaired a cross-movement group on these issues, which led to a major Co-operative and social enterprise event at the Department of Trade and Industry in February 2002, and a meeting between Tony Blair and key representatives from the Co-operative movement and the social enterprise sector at 10 Downing Street. Following the recommendations of the Co-operative Commission, which published its findings and recommendations in 2001, a new foundation organisation, 'Co-operative Action', was launched in April 2002. Co-operative Action has been established to assist communities to develop co-operative, mutual or social enterprises, through the provision of grants and loans. The foundation has been created from donations made by Co-operatives throughout the UK. The bank has been proud to take a key role in this venture, contributing an initial £500,000 towards the establishment of the foundation and encouraging staff involvement in both the management team and the Board.

As part of the Co-operative family of businesses, we continued our programme to install cash machines in Co-operative retail stores throughout the UK. This initiative continues to bring banking facilities into areas that often had none and, as such, is an important part of our continuing efforts to promote financial inclusion. It is also an excellent example of the unique advantages of co-operation in action.

In May 2002, this partnership brought about the launch of the new Co-op Dividend VISA credit card. Having revived the famous 'Divi' through its Dividend card, the Co-operative Group's retail operations can now offer customers not only the chance to earn extra Dividend at its own stores, but also an additional Dividend at any outlet displaying the VISA symbol.

Our home in the Co-operative family of businesses allows us to explore different ways of delivering our services to our customers. For example, we have recently brought together the Co-operative Group's travel business, Travelcare, with CIS and our own banking services in our flagship central Manchester retail outlet at No.1 Balloon Street.

A responsible company
Possibly the best modern expression of our co-operative values is the priority we are able to give to ethical, social and ecological issues. Over the years, we have built a strong reputation in these areas and our commitment was recognised not only nationally but also globally in 2002. A Queen's Award for Enterprise, in the Sustainable Development category, was conferred on the bank in April 2002 in recognition of our Partnership Approach to management. Later in 2002, we were also honoured to receive the Special Judges' Award for Overall Corporate Social Responsibility Performance at the prestigious New York-based Global Corporate Conscience Awards, effectively making us the first UK company to be named as the world's most socially responsible business.

In May 2002, we marked the tenth anniversary of our ethical stance by launching our updated policy. The new policy is a clear statement of who we will, and will not, do business with. Its publication followed an extensive consultation with customers, which took place over an 18-month period. My colleagues and I were very pleased with the response - particularly as the results revealed growing interest in, and support for, our ethical policy amongst both business and personal customers.

In our annual Partnership Report, published alongside these financial statements, we provide much more detailed information about our partners' attitudes towards our ethical policy and about our performance against a number of other key ethical and ecological indicators. We began producing this separate 'warts and all' sustainability assessment in 1998, and we are still the only UK retail bank to produce such an independently verified report. In March 2003, our Partnership Report was declared to be the Best Sustainability Report in the UK at the Association of Chartered Certified Accountants UK Awards for Sustainability Reporting 2002. This followed international recognition in 2002, when the United Nations Environment Programme (UNEP) and SustainAbility ranked the bank's report as first in the biennial Global Benchmark of Sustainability Reporting.

Our 2002 Partnership Report records the major progress the bank has made in recent years towards reducing its ecological impact. Almost two-thirds of the waste now leaving the bank is either reused or recycled, and the carbon dioxide emissions resulting from the electricity consumption of our buildings have reduced by 90% per customer account since 1997 - with 98% of the electricity we use now being sourced from renewable sources. I am also proud to report that, at a time when the world is losing species at an everincreasing rate, the bank's own initiatives on biodiversity have resulted in the amount of land with significantly increased biodiversity being ninety times greater than the land occupied by the bank's operations. We also upheld our strong campaigning tradition in 2002 with the latest 'Customers Who Care' initiative, which drew attention to the humanitarian impacts of cluster bombs. The campaign calls for a new international protocol on the post-conflict clearance of unexploded weapons, including cluster bombs. In June 2002, we welcomed the Rt Hon Clare Short MP, Secretary of State for International Development, to the Westminster launch of Explosive Remnants of War, a report we produced with our campaign partners Landmine Action (a coalition which includes many major charities, such as Amnesty International, Christian Aid and Oxfam). The first of its kind to document the social and humanitarian impacts of unexploded ordnance, the report has been commended by the UK Government as having made a useful and positive contribution to moving discussions forward. The report also continues to be a key tool for our partners as they lobby the UN to adopt a new international agreement on explosive remnants of war (ERW). These activities achieved a successful outcome when, in December 2002, the UN announced that negotiations to establish an international agreement on ERW would commence in 2003. The bank will continue to support Landmine Action in 2003 as the UN negotiations progress.

2003 and beyond
Looking ahead, I am confident that the bank's belief in its ethical, social and ecological responsibilities - combined with our investments in our people, customer focus and product innovation - will continue to serve us well.

The UK banking sector is now operating in an environment of significantly increased competition and greater regulation. With the economic prospects for the UK and many other countries being currently somewhat uncertain, I can only be cautiously optimistic that 2003 should be another rewarding year for The Co-operative Bank.

The recent establishment of Co-operative Financial Services (CFS) is an important event that will help us to bring the benefits of the Co-operative approach to an even wider audience. As the two businesses of The Co-operative Bank and CIS work increasingly more closely together, the benefits of a broader range of products, services and convenient access for our customers should be considerable.