Co-operative Financial Services and Britannia Building
Society have confirmed they are looking to merge to form what they
term a ‘super-mutual’. Britannia’s CEO, Neville Richardson, tells
Douglas Blakey the merger will ‘turbo-charge’ the combined group’s
prospects in the volatile UK consumer financial service
market.
M&A activity in the volatile UK banking market
continues with the proposed deal between Co-operative Financial
Services (CFS) and the Britannia Building Society to form the
country’s eighth-largest banking group by branches. The combined
entity – which is being portrayed as a merger of equals but is more
a take-over of Britannia by CFS – will form a £76 billion ($108.6
billion) asset business with combined deposits of almost £30
billion and retail and commercial lending of £27 billion and £8
billion, respectively.
Go deeper with GlobalData
The new business will seek to combine the Co-op’s personal and
corporate banking, insurance and investment strength with
Britannia’s larger branch network and savings and mortgage product
portfolio.
With 9 million retail customers and 354 branches, the new group
will have greater scale to compete with the leading mutual, the
£200-billion-asset Nationwide Building Society, and weakened
private sector rivals.
The plan is to play on the ‘ethical’ business model of both CFS
and, less so, Britannia. CFS is the UK’s leading ethical and
environmental financial services organisation and is run on strict
guidelines. The Britannia, as a mutual, has long used its status in
its marketing – it has been running a ‘fairness agenda’ for the
past year as a market differentiator against commercial banks.
A successful Co-operative/Britannia tie-up remains subject to
the UK Parliament enacting legislation – which has been agreed –
during the first quarter enabling mutuals and co-operatives to
combine, a move widely expected to preface further consolidation
among smaller UK mutuals. The legislation is expected to interest
so called ‘friendly societies’ such as Liverpool Victoria, while
life insurers such as Equitable Life and Royal London have also
been mentioned as possible beneficiaries of the amendment.
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By GlobalDataJeremy Palmer, the head of financial policy at the Building
Societies Association (BSA), told RBI that his association
has broadly welcomed the legislation since it was first mooted in
2007 and that it may mean more UK societies and mutuals merging.
There were four sector mergers at the end of last year, including
Nationwide’s acquisition of both Cheshire Building Society and
Derbyshire Building Society (see RBI 604).
In terms of branch numbers, four of the top 10 players in the UK
market are now mutuals (see table below). CFS recently
said that, due in part to customer unease over commercial banks, it
had a registered a 65 percent increase in customers transferring
their account to the Co-operative Bank (see RBI 605).
RBI spoke to Britannia’s chief executive, Neville
Richardson (NR), who will also be the chief executive of the new
group, about the deal.
|
PRO FORMA |
||
|
UK – Co-operative Financial |
||
|
Britannia BS |
Co-operative |
|
|
Mortgages & unsecured lending (£bn) |
21.4 |
5.6 |
|
Deposits (£bn) |
17.6 |
11.2 |
|
Long-term life fund assets |
n/a |
17.7 |
|
Profit before tax (£m) |
50.5 |
81.2 |
|
Net interest margin (%) |
0.94 |
2.71 |
|
Cost-income ratio (%) |
57.4 |
60.1 |
|
Tier 1 ratio (%) |
10.6 |
8.5 |
|
Total assets (£bn) |
36.8 |
39.8 |
|
Source: Britannia Building |
||
|
Top 10 |
|
|
UK retail banking groups, ranked |
|
|
|
No of branches, January |
|
Lloyds Banking Group |
3,451 |
|
Royal Bank of Scotland |
2,278 |
|
Barclays |
1,733 |
|
HSBC |
1,501 |
|
Santander UK (1) |
1,156 |
|
Nationwide Building |
864 |
|
NAB UK (2) |
412 |
|
Co-operative Financial Services + |
354 |
|
Yorkshire Building |
142 |
|
Skipton Building Society |
93 |
|
Total |
11,984 |
|
Notes: (1) Santander UK |
|
RBI: Can you clarify the legal status of the
newly merged group?
NR: Building societies and co-operatives are both mutuals –
businesses owned by their members. The new business will be a
co-operative, part of The Co-operative Group. Britannia members
will become members of The Co-operative Group and will need to
approve the deal in a vote at a general meeting expected to take
place on 29 April 2009.
Voting packs will go out to Britannia members in mid-March.
RBI: How will you persuade Britannia members to
support the merger when there is no so-called ‘sweetener’ or cash
incentive of the sort associated with the widespread
demutualisations of the 1980s and 1990s?
NR: Britannia members are not giving up anything. They’ll
continue to get all the things they value about Britannia. They’ll
still own the business, they’ll still get the same high standards
of service and they’ll still get a share of the profits.
In addition, they’ll be able to access the full range of
banking, savings, investment, insurance and mortgage services from
an expanded network of more than 300 branches, British-based call
centres and the internet, and have the opportunity to earn greater
rewards through membership of The Co-operative Group, one of the
world’s largest and most successful consumer co-operatives with
business interests in financial services, food, travel, pharmacy
and funeral care.
Interim arrangements will ensure that Britannia members do not
lose out as we transition from one reward system to another –
details will be supplied to members in due course. The combined
business will expect to deliver more than £60 million a year in
efficiency and revenue benefits from year three and, as a
customer-owned business, customers will share in these savings
through more competitive rates, improved customer service or
increased member dividends.
RBI: On the matter of branding, is there not an
argument to drop the Britannia brand soon after the merger? And
what are your initial thoughts on how best to market the new
group?
NR: We recognise that both the Britannia and Co-operative brands
are valued and trusted.
In the immediate future, we will continue to trade under both
brands. In due course, we will consult with our customers to
understand which brand or brands have most meaning for them. It’s
worth noting that the Co-op already operates a different brand in
its internet bank, Smile. It’s too early really to talk about
marketing but we do believe we have a unique opportunity to offer a
real alternative to shareholder-owned banks, giving customers a
strong, fair and ethical business that they own, where they have a
real say in setting strategy and where the profits they help to
generate are not creamed off to pay external shareholders.
RBI: How do you respond to a number of critics
who have suggested Britannia is keen to press ahead with the deal
as it knows there is bad news to come from its Platform mortgage
intermediary, participation in sub-prime lending and the losses
arising from investments in two failed banks?
NR: No financial services business is immune to the seismic
changes in the market over the last 18 months. Britannia has been
open about the particular challenges it faces. We’ve provided for
losses arising from a small area of lending carried out in 2006-07
that is understood and contained.
We have also reiterated that we have great financial strength –
we’re trading profitably, with masses of liquidity and very strong
capital. Neither party needs to do this deal – we’re doing it
because it makes sense for our members’ long-term interests.
RBI: Is the need for scale one of the reasons
for the merger? And in the wider market, might we expect to see a
further wave of consolidation among the mutuals?
NR: Both parties believe the merger will ‘turbo-charge’ their
current plans. The Co-operative wants to achieve more with savings
and mortgages and would like a bigger distribution network –
Britannia gives this.
Britannia, meanwhile, is looking to boost its online offer, it
has no current account and has to use third parties to supply
insurance and investment products – areas in which the Co-operative
already has scale.
The history of the building society sector has been one of
consolidation; Britannia itself is the product of more than 60
mergers over the years. We expect to see further consolidation
across the financial services sector, and this will include
building societies.
RBI: On the subject of online banking, what is
the plan for the new business? Will for example, Britannia members
migrate to the Co-op’s internet bank Smile?
NR: It is too soon to say. We have no immediate plans to change
current offers but we will look to promote a single product range
as quickly as possible.
As for IT integration, high-level planning is now under way. We
expect the integration process to take about three years. Systems
integration is clearly a key part of this and a major enabler for
the wider integration so will receive early focus.
RBI DealWatch
RBI DealWatch tracks global financial services
mergers and acquisitions, privatisations and demutualisations,
flotations, divestments, share stakes, strategic alliances and
joint ventures.
| Country | Participants | Type/value | Description | Date |
| Europe, Middle East, Africa | ||||
| Ireland | Bank of Ireland, Allied Irish Banks | Government recapitalisation | The Republic of Ireland government is set to inject up to €8 billion into the country’s two largest banks, AIB and Bank of Ireland. The government says it is keen to limit its stake in both banks to less than 30 percent. |
03-Feb |
| Global | ABN AMRO, Royal Bank of Scotland | Possible assets buyback | ABN AMR0 has discussed buying back some its former assets from Royal Bank of Scotland (RBS), according to the Netherlands’ finance ministry. UK government-controlled RBS, which will report a loss in 2008 of up to £28 billion (see RBI 605), is currently reviewing its operations, with large scale disposals anticipated. |
02-Feb |
| Kazakhstan | Sberbank, BTA | Possible acquisition | Sberbank, Russia’s largest financial services group, is reportedly in talks to acquire Kazakhstan’s largest bank, BTA. News of Sberbank’s interest on 2 February followed within hours of the Kazakh government nationalising BTA. The Kazakh government has taken a controlling stake for a nominal sum in the country’s fourth-largest bank, Alliance Bank. In late January, the government said it would take stakes worth around $1 billion in each of the country’s second- and third-largest banks, Kazkommertsbank and Halyk Bank, with a view to selling the shares once the economic crisis subsided. |
02-Feb |
| France | Crédit Agricole | Strategy update | Crédit Agricole’s chief executive, Georges Pauget, has said the bank will not participate in a second round of French state aid. In comments to the press at the Davos economic summit, Pauget also said Crédit Agricole intended to hold onto its current 5.4 percent stake in Italian bank Intesa Sanpaolo. |
30-Jan |
| Austria | Raiffeisen Zentralbank | Government recapitalisation | Raiffeisen Zentralbank (RZB) has agreed a government capitalisation package worth €1.75 billion to shore up its balance sheet. Last year, the Austrian government set aside €15 billion to assist its banking sector. |
30-Jan |
| Sweden | SBAB | Privatisation postponed | Sweden’s government has postponed the privatisation of mortgage lender SBAB due to the economic crisis. SBAB had been high on the list of assets the centre-right government was keen to sell as part of the country’s biggest ever privatisation drive, aimed at realising a total of around SEK200 billion ($24.1 billion). For fiscal 2008, SBAB reported an operating profit of SEK585 million, up from SEK258 million in 2007. |
30-Jan |
| Bulgaria | Sultanate of Oman, Corporate Commercial Bank | Stake acquisition | Corporate Commercial Bank, Bulgaria’s tenth-largest bank by assets, has agreed a deal to sell a 30 percent stake to Luxembourg-registered Bulgarian Acquisition Company, an investment fund controlled by the government of the Sultan of Oman. Financial details of the deal were not disclosed. |
27-Jan |
| Kuwait | Gulf Bank | Capital raising | Gulf Bank’s shareholders have subscribed to 68 percent of the bank’s capital raising exercise. The programme was designed to raise KWD375 million ($1.26 billion) in a 100 percent emergency rights issue. The remaining shares have been acquired by the country’s sovereign wealth fund, the Kuwait Investment Authority. |
27-Jan |
| Malta | Finansbank, National Bank of Greece | Sale of Maltese business unit | Turkey’s Finansbank, a subsidiary of National Bank of Greece (NBG), has sold its Maltese subsidiary to another unit of NBG for €185 million. Finansbank recently reported that the Turkish market was slowing down due to the global economic malaise, with total loans up by only 3 percent in the fourth quarter. |
26-Jan |
| UK | Royal Bank of Scotland, Ulster Bank, First Active | Merger | Royal Bank of Scotland’s Northern Ireland subsidiary, Ulster Bank, is to merge with RBS’ Irish-based mortgage and investment arm, First Active. Following the merger, the First Active brand will be dropped, and the total branch network will be 295 branches. |
26-Jan |
| France | Crédit Agricole, Société Générale | Merger of business units | Crédit Agricole and Société Générale have agreed to merge their asset management business units in a deal the banks said would result in annual cost savings of around €120 million within three years. The combined business has €638 billion under management and will become the fourth-largest asset management business in Europe. Crédit Agricole and SocGen will own 70 percent and 30 percent respectively of the new business. |
23-Jan |
| Spain | Bankinter | Strategy update | Spain’s Bankinter, the country’s sixth-largest by market capitalisation, has no need to raise extra capital, according to its chief executive Jaime Echegoyen. He said the bank regards its core capital ratios as “sufficient” given the bank’s conservative business model and its better than average level of non-performing loans. |
22-Jan |
| Georgia | EBRD, International Finance Corporation, Bank of Georgia, TBC Bank |
$200 million aid | The European Bank for Reconstruction and Development (EBRD) and the World Bank’s International Finance Corporation, have agreed a $200 million joint loan for the Bank of Georgia, Georgia’s largest commercial bank. Separately, the country’s second-largest bank, TBC Bank, is planning to sell around 20 percent of its equity to an international consortium as it seeks to raise $160 million. TBC is reported to be aiming to sell shares to IFC and EBRD as well as Dutch development bank FMO, in part to help pay off a $100 million loan from Merrill Lynch. |
20-Jan |
| UK | Lloyds Banking Group, HBOS | Acquisition concluded | Lloyds Banking Group has completed its government-sponsored acquisition of HBOS, in the process gaining an unprecedented market share of the UK retail banking market – but at the cost of the UK government taking a 43 percent stake in the combined entity following negligible take up of the banks’ respective capital raisings. |
19-Jan |
| Ireland | Anglo Irish Bank | Nationalisation | Ireland’s third-largest bank by assets, Anglo Irish Bank, has been nationalised by the Republic of Ireland government following a run on the bank by investors and rumours of the same by retail customers. |
15-Jan |
| Germany | Deutsche Bank, Deutsche Postbank | Acquisition terms amended | Deutsche Bank’s acquisition of Deutsche Postbank has been renegotiated. Deutsche will now purchase an initial stake of 22.9 percent in Postbank and underwrite Deutsche Post bonds in return for a further 27.4 percent stake in three years’ time. In return, state-owned Deutsche Post will take a temporary 8 percent stake in Deutsche Bank. |
14-Jan |
| Turkey | Bank Hapoalim, Millennium Banco Commercial Portuguese |
Acquisition | Israel’s Bank Hapoalim is reported to be weighing up the Turkish operations of Millennium Banco Commercial Portuguese (BCP), with a view to an acquisition. A merger involving Hapoalim’s existing Turkish lender, BankPozitif Credi Ve Kalkinma Bankasi, with BCP’s local unit would enable Bank BankPozitif to accept deposits from the public. BCP has indicated a willingness to sell its Turkish operations to focus on its core businesses. |
09-Jan |
| The Americas | ||||
| US | Ocala National Bank | Bank failures | Florida-based Ocala National Bank has been closed by regulators with the Federal Deposit Insurance Corporation named receiver. As of 31 December, Ocala had total assets of $223.5 million and total deposits of $205.2 million. Flordia-headquartered CenterState Bank has acquired all of the failed bank’s deposits for a premium of 1.7 percent as well as its four branches. This brings to six the number of banks to fail in January. |
30-Jan |
| US | Citi, Banamex | Strategy update | Citi intends to keep its Mexican unit Banamex, the country’s second-largest bank, and will allocate the business to its so-called good bank division Citicorp (see RBI 605). Citi acquired Banamex for $12.5 billion in 2001. |
22-Jan |
| Brazil | Bradesco, BicBanco | Possible acquisition | Sao-Paolo-based Banco Industrial e Comercial (BicBanco) has denied rumours it is set to be acquired by the country’s second-largest bank, Bradesco. BicBanco is the country’s eighth-largest bank by assets. |
15-Jan |
| Canada | Bank of Montreal, AIG | Purchase of business unit | Bank of Montreal, Canada’s fourth-largest bank by assets, has agreed a C$375 million ($305 million) deal to acquire the Canadian life insurance business of American International Group (AIG). |
13-Jan |
| Asia-Pacific | ||||
| Thailand | Scotiabank, Thanachart Bank | Stake increase | Canada’s Scotiabank has paid about C$270 million ($217.2 million) to acquire an additional 24 percent stake in Thailand’s Thanachart Bank, the country’s eighth-largest bank by assets, boosting its stake to 49 percent, the regulatory limit for foreign banks in Thailand. |
03-Feb |
| Japan | Bank of Japan | Central bank support | Japan’s central bank has said it is setting aside up to ¥1 trillion ($11.2 billion) to acquire shares in the country’s banks. The central bank said it will buy stocks of banks with a credit rating of BBB- and higher but will only buy up to ¥250 billion of shares in any one bank. |
03-Feb |
| China | Agricultural Bank of China | Capital raising update | The Chinese government has confirmed it is close to finalising details of the long-planned recapitalisation of Agricultural Bank of China (ABC). A report in the Financial Times said the government will now inject $30 billion into ABC, an increase from a previously announced $19 billion. |
02-Feb |
| India | BNP Paribas, Geojit Financial Services | Stake increase | BNP Paribas has increased its stake in Indian brokerage Geojit Financial Services from 27.1 percent to 32 percent after conversion of warrants issued to the French bank in March 2007. |
24-Jan |
| India | State Bank of India | Strategy update | India’s largest bank, State Bank of India, may raise an additional $4 billion in capital in the next financial year which starts in April, according to its chairman O P Bhatt. |
23-Jan |
| Philippines | AIG, East West Bank, PhilAm Savings Bank | Sale of business unit | Troubled US insurer AIG has agreed to sell its Philippine-based retail bank, PhilAm Savings Bank, and auto-lending unit to California-based East West Bank, in a deal worth around $48.5 million. PhilAm had deposits of around $205 million at the end of 2008 and has nine branches in the Philippines. |
23-Jan |
| Indonesia | ANZ, PT Panin Bank | Stake increase | ANZ has increased its stake in Indonesia’s Panin Bank by 8.4 percent in a A$166 million deal, taking its stake in Panin to 38.3 percent. ANZ’s Asia-Pacific CEO, Alex Thursby, said Indonesia was a key market for the bank’s Asian expansion plans. With a branch network of 364 units, 400,000 customers and assets of A$8 billion, Panin is Indonesia’s seventh-largest bank by assets. |
13-Jan |
| Source: RBI | ||||
