Interim results for The Co-operative Group for the 26 weeks ended 6 July 2013
29 August 2013
The following amendments have been made to the 'Interim Results' announcement released on 29 August 2013 at 7.00am under RNS No 6997M.
The Co-operative Bank half-year report issued earlier today contained a processing error which resulted in certain items of incorrect data being published on pages 53-57. This report was appended to The Co-operative Group half-year report issued earlier today. None of the numbers or ratios stated in the Group interim report and accounts, or the Bank’s Business and Financial Review require correction.
An updated half-year report for both the Co-operative Bank and The Co-operative Group has now been issued.
All other details remain unchanged.
The full amended text is shown below.
29 August 2013
Interim results for The Co-operative Group for the 26 weeks ended 6 July 2013
|Financial performance summary||
|Underlying Operating (Loss)/Profit*|
|Banking Group - core||(82)||78|
|Banking Group - non-core||(375)||(73)|
|Group Underlying Operating (Loss)/Profit||(356)||140|
|Group Statutory Pre-Tax (Loss)/Profit**||(559)||18|
|Of which -|
|Trading Group Businesses||150||75|
- £1.5bn capital shortfall at Bank reaffirmed
- Significant first-half Bank losses and currently anticipated future losses covered by the Capital Action Plan
- Robust action taken by new management to assess loan book, manage liquidity and initiate new strategy drives £496m of first-half loan impairments
- Planned contribution from Group of up to £1bn unchanged
- Flotation of refocused Bank as part of Exchange Offer anticipated in fourth quarter
- Group revenue falls 1%; Food and Specialist Businesses produce solid performance; net debt falls on strong Trading Group cashflow and sale and leaseback of head office
- Group strategic review underway
- Four-year turnaround planned by strengthened management team
- Self-help measures to drive cost savings in Group and Bank
* The underlying Operating Loss/Profit excludes significant items, property disposals, the Financial Services Compensation Scheme levy, fair value amortisation and the change in value of investment properties
** Group Statutory figure is the (Loss)/Profit before tax and member payments, equivalent to pre-tax profits in a PLC
Euan Sutherland, Group Chief Executive of The Co-operative Group, said:
“This has been a very difficult first half for The Co-operative Group and the results highlight both the well-documented challenges faced by The Co-operative Bank and the significant work to do at Group level. Importantly, today’s announcement also underlines the need for the £1.5bn Capital Action Plan we announced in June to stabilise the Bank, which we reaffirm today and which remains on track.
“Having become Group Chief Executive in May, my first few months in the role have been focused on putting in place the recovery plan for the Bank, while also starting the important thinking about the changes that need to be made across the Group. Central to all that work has been the significant strengthening of the management team and we now have in place the right team at both Group and Bank, with the turnaround experience and drive needed to deliver on our goals and implement the difficult decisions that we are faced with.
“We remain convinced of the considerable potential to be realised across the Group and are confident that we are well placed to restore the Co-operative brand to its rightful place at the heart of communities up and down Britain. We will recapture the relevance of the Co-operative Group by bringing modern day disciplines and performance management to bear on the mutual model.
“There are no quick fixes here. This will be a challenging four-year turnaround that begins with our comprehensive plan to restore the Bank to stability, which was agreed with the Prudential Regulation Authority (PRA), the banking regulator. We will build on that plan with a wider transformation of the Group as a whole. My team and I have embarked on a strategic review that will lay the foundations for that. This will be a major transformation that will rely on the continued support of our customers, members and colleagues.
“The Exchange Offer, which is subject to the agreement and consent of the Group’s syndicated lenders, is a crucial first step because it will stabilise the Bank, giving it the time to re-focus on its key retail and small business customers. We are also in a strong position to take advantage of our position as the country’s leading convenience store operator, and with Pharmacy, Funeralcare and Legal Services, we have a group of businesses that promise much for the future and we will ensure we make the most of them. There is a great deal of work to be done, but it is already clear that we have significant opportunities to reduce our cost base in the Bank and across the Group.
“These results show the scale of the problems in our Bank. The Co-operative Group clearly regards the Bank as a core part of the Group and we are therefore shouldering the burden of the Bank’s recapitalisation with our planned contribution of up to £1bn to the Capital Action Plan. That will allow us not only to benefit from the Bank’s transformation under its strengthened management team, but also to provide great service for our 4.7 million Bank customers, while safeguarding the interest of other stakeholders.
“We are asking affected Bank bondholders and preference shareholders to contribute to a recapitalisation plan that we believe is in the best long-term interests of the stakeholders in the Group and the Bank. We have assessed all the available options and we believe the Capital Action Plan will prevent the more severe adverse consequences for all stakeholders which might occur in the absence of this Plan and our support of it. Following the Exchange Offer, our equity stake in the Bank will come only as a direct result of our planned substantial contribution and we will be the only party injecting fresh capital into the business. While I recognise the concerns of affected Bank bondholders and preference shareholders we remain confident that under the plan announced we are doing all we can to deliver the best solution for the future of the Bank – something that is in the longer-term interests of all stakeholders.
“In all this, I recognise that recent months have not been easy for our customers, members and colleagues and I would like to thank them for their support through this difficult period.”
Niall Booker, Banking Group Chief Executive and Deputy Group Chief Executive, said:
“We recognise the disappointment all stakeholders must feel about the financial performance we are reporting for the half year. This in turn reflects the deep rooted problems that the Bank faces which led to the £1.5bn Capital Action Plan announced in June. Today’s results reaffirm that requirement, which covered the losses announced today as well as currently anticipated future impairments.
“The underlying issues in the results today are not new, with significant additional impairment charges leading to heavy losses. These were largely driven by a further £496m of impairments on loans, principally the result of a fresh review of non-core assets and partly driven by our developing knowledge and the earlier-than-anticipated disposal of some of those assets. We have also further written down our IT assets by £148.4m, taken an additional £61m of provisions for customer redress, including PPI, and there are significant charges of £34.6m.
“We are now clearly focused on improving the capital position of the Bank and to that end we are undertaking the detailed work that is needed ahead of the launch of the Exchange Offer to our subordinated bondholders and preference shareholders. At the same time, we have continued to lend, maintaining our focus on supporting our loyal customers, both in retail and through our continued focus on lending to small and medium-sized businesses.
“We remain confident of a successful completion of the Exchange Offer, an outcome that would underpin the Bank’s capital position and support the measures already taken to ensure liquidity remains in excess of regulatory requirements. It should also provide the foundations to support the longer-term stability of the Bank, focused around our heritage and strength as a core relationship Bank, which we believe can offer a compelling alternative to customers.”
- We continue to work on the detail of the plan, as agreed with the PRA, for capital and management actions to generate additional fully phased common equity tier 1 capital of £1.5bn for the Bank and provide stability:
- Following the announcement of the plan on 17 June 2013, we expect to publish the necessary documentation for the Exchange Offer to investors in the Bank’s subordinated capital securities in Q4 2013. The implementation of the Exchange Offer, which will generate at least £1bn of capital, remains subject to the agreement and consent of the Group’s syndicated lenders
- In relation to the £500m contribution in 2014, which is conditional on the completion of the Exchange Offer, this is expected to be primarily funded from the proceeds of sale of the insurance businesses. The sale of the Life and Savings business completed on 31 July 2013. We continue to make progress on the planned sale of the General Insurance business, which is expected during 2014; this business recorded a solid result in the first half of the year
- The outcome of a wide-ranging review of Group strategy, which will detail a comprehensive transformation plan for our family of businesses, will be outlined to members at the Annual General Meeting in May 2014. We will provide an update on this process at the time of the publication of Group results in March 2014
- The findings of Sir Christopher Kelly’s independent review into the events that led to announcement of the Bank’s Capital Action Plan, is due to be reported to The Co-operative Group AGM in May 2014
- While there are some early signs of recovery in the UK economy, for many of our customers the outlook remains difficult and we continue to focus on providing value to them
- In our Trading Group businesses, the second half of 2013 has started well with current trading in line with expectations. In Food, we anticipate a stronger second half as the benefits of our food strategy start to be realised in better stock availability, improvements to the customer offer and with the refit of more than 400 stores. In Pharmacy, we expect to continue to build on our branch transformation initiative to achieve further improvements in prescription growth, driven by an improved focus on customer service. In our Funeralcare business, we are planning to open further branches and to expand the crematorium estate. In Legal Services, we will continue with our plans to develop this growing business
- The Bank has developed a recapitalisation plan (‘the Plan’), as announced on 17 June 2013, which has been discussed with the relevant regulatory bodies. The key objective of the Plan is to significantly strengthen the Bank’s fully phased common equity tier 1 capital base and to refocus its strategy around its strength in core relationship banking providing current accounts, residential mortgages and savings products to individuals and small business banking customers.
The main deliverables of this Plan include:
- An increase in CET1 capital of £1.5 billion from a combination of capital injection from The Co-operative Group and Exchange Offer met in three broadly equal proportions from:
- the capital generated from new shares in the Bank issued as part of an exchange offer to be made to holders on the Bank’s subordinated capital securities
- a further contribution from the Group by way of the issue of a fixed-income instrument as part of the exchange offer (items 1 and 2 together, the “Exchange Offer”); and
- the contribution of sale proceeds of Co-operative Life Insurance and Asset Management and Co-operative General Insurance to the bank, interest savings on retired bank’s subordinated capital securities and certain management actions by the bank.
For the avoidance of doubt, the capital generated for the Bank through the Exchange Offer will be derived not only from items 1 and 2 above but also as a result of redeeming the Target Securities in the Exchange Offer below the Bank’s current book value.
- Reduction in the non-core asset portfolio
- A simplification and restructuring programme supporting the core relationship bank specifically focusing on the existing cost base
Work is continuing to finalise the exact details of the shape and structure of the core Bank, the systems underpinning it, the product range and target customer base as well as the changes to the cost base needed to return the business to profitability. The evolution of the Bank’s plans, including the increased rate of reduction in the non-core business and its impact on the amount and timing of the impairment provisions, now and going forward, will have an effect on our fully phased common equity tier 1 capital position and leverage ratio. In the announcement of 17 June 2013, we said that, assuming completion of the Exchange Offer, we expected the CET1 ratio to be above 9 per cent at the year end. We now believe that this will be below 9 per cent, but above the regulatory minimum requirement, and that the leverage ratio may not reach 3% by the year end.
In terms of the existing cost base, the Bank recognises that its cost to income ratio remains high and reducing the cost base is a priority for the business following a successful completion of the Exchange Offer.
The short-term outlook continues to be challenging for the Bank but, on the basis that the Bank effectively navigates its way through the short term issues it is facing, the Bank Board and management team believe that this recapitalisation plan, combined with the work currently underway to develop a strategy and business plan to return the Bank to profitability over time, will allow all stakeholders to share in the potential benefits from the transformation on the Bank in the longer term.
At year end 2012, the Bank outlined the need to de-risk non-core corporate assets as part of further strengthening the balance sheet. Selling these assets, which carry the majority of the impairment risk for the Bank, remains an immediate priority for the Bank. Over the last six months £0.7bn of non-core assets have been sold or repaid.
The Co-operative Group:
Russ Brady: 07880 784 442
Susanna Voyle: 020 7353 4200
Target Security Holder Enquiries: 0800 731 2310