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financial
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- Profit before taxation
- Cost/Income ratio
- Return on equity
- Further improve the bank's profits. TARGET ACHIEVED
- Maintain the reduction in the bank's cost/income ratio. TARGET ACHIEVED
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performance
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The Co-operative Bank p.l.c. |
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MBBG: Major British Banking Group |
| (Source: Financial Control 2003) |
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commentary
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Financial results In 2002, The Co-operative Bank achieved a
profit before tax of £122.5 million, £15.0 million (14.0%) higher
than 2001. Earnings attributable to the equity shareholder,
after tax, were £78.2 million, a rise of 14.2%, and the return
on opening equity, after tax, was 19.8%, a reduction of
1.2 percentage points  (cf. Major British Banking Group
average of 10.3%). The increase in profitability arose from
higher operating profits, before bad debts, reflecting a 6.1%
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 £3.9 million, was better than last year at 1.60%
of year-end loans and advances to customers.
Balance sheet The balance sheet remained robust
throughout the year with continued strong liquidity and capital
ratios. The year-end risk asset ratio was 14.1% with a Tier I
Ratio of 10.6%, substantially higher than the regulatory
standards. At the year-end, balance sheet liquidity was
underpinned by £2.5 billion of highly-rated debt securities. In
2002, retail customer deposit and lending balances growth
was relatively strong and balanced. Average customer retail
deposits of £5,478 million grew by £591 million (12%) and
were £1,533 million higher than retail lending balances.
Average customer retail lending balances were £3,945 million
in 2002, higher than last year by £402 million (11%). The
growth in retail customer deposits was primarily within the
personal sector. Average personal sector balances of £3,673
million were £507 million (16%) higher than last year, including
strong growth in deposits at smile, the bank's full-service
internet operation. Corporate average deposit balances
increased by 5% to £1,805 million. During the last year, asset
growth has been carefully targeted to maintain credit quality
whilst maintaining a balanced portfolio of personal and
corporate business. Lending increased in both the corporate
and personal sectors, although growth was stronger in the
personal sector with an increase in average lending by
£315 million (17%) to £2,205 million. This reflected increased
demand for the bank's new and wider range of mortgages
along with a steady rise in Visa balances. Average corporate
lending balances increased by £87 million (5%).
Operating income Operating income of £483.4 million was
£27.8 million (6.1%) higher than last year, reflecting steady
growth in both net interest income and non-interest income.
Net interest income was £329.6 million, an increase of
£16.1 million (5.1%), mainly due to growth in customer
balances, partly offset by a reduction of 0.2% in the net interest
margin. Product margins have remained relatively stable
overall and the bank's interest spread (the difference between
interest rates paid on deposits and that earned from loans)
at 3.7% was unchanged from last year. The contribution of
interest-free liabilities declined by 0.2% to 0.5% due to the
lower interest rate environment. As a result, the overall net
interest margin was 4.2% compared with 4.4% last year.
Average interest-earning assets of £7,755 million increased by
£580 million (8.1%), reflecting growth in retail customer lending
of £402 million and an increase in wholesale market
placements of £178 million. Average interest-bearing liabilities
rose by £453 million (7.5%) to £6,454 million, driven by
growth in average interest-bearing retail customer deposits of
£496 million, partially offset by lower wholesale deposits. The
increase in average interest-free balances mainly arose from
higher current account balances and the bank's retained
earnings. Non-interest income of £153.8 million was
£11.7 million higher than last year, an increase of 8.2%. Net
commission and fee income increased by £12.4 million, mainly
reflecting higher inter-bank commission from the bank's
expanded cash machine network together with higher Visa
commission, mortgage arrangement fees and customer
service fees. Insurance commission income was slightly higher
than last year by £0.4 million. Other income was £1.1 million
lower than last year due to lower dealing income and
wholesale commission in 2002. Most of the bank's income
from treasury activities is included in net interest income.
Operating costs Operating costs of £290.8 million were
£8.9 million higher than last year, a rise of 3.2%. The increase
in costs arose mainly from additional business development
expenditure and higher staff costs. The cost/income ratio
improved to 60.2%, better than last year by 1.7 percentage
points. Staff costs were £5.7 million (4.9%) higher than last
year, mainly reflecting the annual pay award, higher pension
contributions and business growth. Staff numbers increased
due to expansion in the smile and mortgage customer service
centres. Other administrative expenses and depreciation costs
increased by £3.2 million (1.9%), reflecting incremental
expenditure on the strategic business developments such as
the expanded cash machine network and new technology.
System projects in 2002 included initial work on re-designing
the underlying technical infrastructure of the banking systems,
development of the bank's payment systems in response to
banking industry initiatives, and development of modern risk
management systems in line with future regulatory standards.
Excluding this additional investment spending, other
administrative expenses were lower than last year.
Bad and doubtful debts The profit and loss charge for bad
debts of £70.1 million was £3.9 million higher than last year,
mainly due to higher corporate sector provisions. The bad debt
charge represented 1.60% of year-end loans and advances to
customers, an improvement of 0.11% over last year. The credit
quality of the personal portfolio remained stable and personal
sector bad debt charges increased by only £0.5 million (0.8%).
Credit criteria have been progressively tightened over the last
three years and the bad debt charge increased at a slower rate
than the growth in customer balances. The bank's corporate
lending is largely to small and medium-sized business
enterprises and credit quality has remained stable with low bad
debt charges in recent years, partly reflecting the write-back of
prior year provisions following the realisation of problem loans.
In response to the uncertain economic outlook, credit approval
standards have become more conservative, with more
stringent standards related to the quality of security and the
customer's ability to generate cash flow during an economic
downturn. In addition, the management of potentially higher
risk lending sectors has been strengthened and increased
provisions have raised against a small number of accounts
within these sectors to reflect this higher risk exposure. As a
result, Corporate sector bad debt charges were £8.5 million,
higher than in 2001 by £3.4 million. The bad debt charge as a
percentage of average balances was 0.5%, compared to 0.3%
last year.
Summary In 2002, the bank continued to grow strongly,
despite increased competition. Profitability has risen, cost
efficiency has improved and a good return on capital has been
generated. Further details of the bank's financial performance
are provided in the 2002 Financial Statements (follow this link to the bank's 2002 Financial Statements)i.
Value added For the first time, the bank this year provides an analysis of economic 'Value Added' (follow this link to the analysis of economic 'Value Added').ii 'Value
added' expresses the contribution to national wealth made by
a commercial organisation, and seeks to recognise that a
variety of Partners can benefit from such wealth creation. For
example, economic value can be disbursed to staff in the form
of salaries and other benefits, to the state in the form of taxes,
to charitable causes in the form of donations, and to owners in
the form of profit, dividend and reserves.
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- www.co-operativebank.co.uk/ethics/partnership2002/fs/index.html
- www.co-operativebank.co.uk/ethics/partnership2002/pr/value_added.html
To follow any of the links mentioned within the Partnership Report 2002, please visit the links page.
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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
Sheila Macdonald, Chief Operating Officer
Bryce Glover, Executive Director
Richard Goddard, Executive Director
Peter Sutcliffe, Executive Director
Shelagh Everett, Director
Caroline Hendra, Director
Patrick Walsh, Director
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