Co-operative Financial
Services has steamed ahead where many rivals have failed, with an
85% jump in pre-tax profits for fiscal 2009. Farah Halime speaks to
John Hughes, the Co-op’s director of retail products about the
group’s drive to grow market share and encourage competition in the
mutuals sector.
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In its first full-year
results since the group’s merger with Britannia Building Society,
the Co-operative Financial Services (CFS), the UK’s second-largest
mutual, posted a solid pre-tax profit of £402m ($610m) up 85% from
£218m a year earlier.
The group chief executive, Peter
Marks, said the “record results” were triggered by customers’
“flight to trust” following a growing dissatisfaction with
commercial banks.
John Hughes, the group’s director
of retail products, reaffirmed this and told RBI: “What
remains true is that there is quite deep disaffection, distrust and
concern I think among many customers about the state of the
financial services in general and banking in particular.”
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By GlobalDataDelight by the
response
“Unsurprisingly, we have positioned
ourselves extremely well to those kinds of concerns and I am
delighted by the response in the last 12 to 18 months,” he
said.
The group, owned by its members and
well-known for its ethical stance on banking, benefited enormously
from a 38% uplift in current account sales last year (see RBI 626), giving it a 4% UK
current account market share.
The bank said customers were drawn
to the Co-op Bank’s trustworthiness and were disappointed with the
poor service from their former lender.
“Are they really delivering
transparency and trustworthiness? What is the moral compass that
organisations are building their business around? These are
becoming absolutely important customer themes,” Hughes said.
Now a
“super-mutual”, following its merger with Britannia, the bank saw
the largest jump in account switchers from the UK’s ‘Big Four’
retail banks, with the numbers switching from Royal Bank of
Scotland up 109%, 101% ahead from Halifax and 92% from Bank of
Scotland.
Hughes did not rule out further
acquisitions but said the bank “can genuinely afford to be bigger
than we are. I think it would be somewhat naïve to rule out other
acquisitional growth”.
He said the Co-op would initially
focus on making the Britannia merger a success over a three-year
period before further growth.
“The merger has to be seen by
customers, colleagues and markets to have been a success. It’s
almost like having the permission to play,” Hughes said.
He added that pressure to make the
merger work was particularly pronounced internally, with a keenness
to move quickly on deploying current accounts in Britannia branches
for example.
“I would like to roll them out and
get them all signed up frankly. I would like that to be done
tomorrow [but] I need to be patient.”
He said the merger process would
have to be “extremely measured” because of previous examples where
integrations had been unsuccessful.
“For it to be rolled out and to
fail would be stupid,” Hughes said, but added there was no external
impetus driving the pressure. “I think we can quite happily do it
for ourselves.”
The bank is ambitious on developing
its product set with Britannia current accounts planned to launch
this year and the harmonising of mortgages. The product roll-out
has already made in-roads with the launch of a three-year tracker
mortgage.
For Hughes, the “sheer scale” of
the merger with Britannia has also made the group well-placed to
grow market share, with a total of 5m customers, representing an
influx of Britannia’s 1.5m members and an increase in retail
outlets to 4,500.
Keeping the Britannia
brand
“I always felt the merger with Britannia was hugely
complimentary and these are words you often hear but it is very
demonstrative in this case,” Hughes said.
For Hughes, the product set, the
distribution model and the heritage in terms of customer and brand
values is “very confluent”.
The bank argues that the merger has
brought the banking and insurance expertise of the Co-op in line
with Britannia’s mortgage and savings knowledge.
The bank also defended its decision
to retain the Britannia brand.
Louise Fowler, director of
marketing for CFS, said there was a danger of misleading customers
as Britannia and the Co-op remain separate entities in terms of the
products offered.
“What would be dishonest would be
to slap a sexy new label on everything but actually it was the same
that you had before,” Fowler said, who came into the merged group
from Britannia.
“It is not the right time to put
some marketing gloss over what is by and large what it was a year
ago, because we have only been merged for six months,” she
added.
Hughes agreed that the decision to
take away the brand should not be taken lightly and said the merger
followed heavy lobbying for the Butterfill Act, which allows
mutuals of different types to merge where previously they were
unable to do so unless they demutualised.
The Act, named after Conservative
politician John Butterfill was far from straightforward to
implement with a number of colleagues working “hard to make [the
merger] happen”, Hughes said.
The legislation led to a string of
consolidations in the UK mutual sector; most recently the Coventry
Building Society announcing it was to takeover Stroud &
Swindon, and Skipton’s takeover of Chesham.
In a different
place
But Hughes was quick to dispel the
new entrants as a threat.
“We are in a different place from
most of those regional building societies,” he said adding that the
bank has faced the economic “storm” better than others.
Hughes did not want to be drawn
into over-arching market share statistics and said the near
doubling of the bank’s share of the switcher market was more
telling.
Instead of viewing new entrants
such as Metro Bank, Tesco Bank and Virgin as competition, Hughes
was very upbeat saying the bank had an established reputation but
new entrants to the market would diversify the banking model.
“The more we build different ways
of doing banking – I can’t see how that’s not beneficial to the
consumer and also to our banking economy,” he said.
“The more we build the band wagon
around the need for this historic model to be changed, the more
choice customers have. I would almost argue there is a collective
benefit.
“Frankly why would you come into
the market if you thought they were mature, static and not
changing.”
He added that in fact, the mutual
sector needed stronger non-plc competition in the market.
Although he refused to name
specific lenders, Hughes said “many lenders are closing on [the
lending] market opportunity for customers for very selfish
reasons”.
He said there were some examples of
mutuals, building societies and commercial banks that were
“unwilling to support key markets” for their own benefit.
“We deliberately sought to come
back into the mortgage market to play a part to make sure that
customers who are in a place where they can afford a higher
loan-to-value have access to reasonably priced mortgages,” Hughes
said,
The bank also said it has a healthy
balance between denying access to loans to customers and offering
loans that over-stretch the customer.
Fowler added that the bank has
“stringent lending policies to our individual customers some of
whom complain and say ‘so and so could have lent me money down the
road’ but we believe under their circumstances it would have
stretched them too far and it wouldn’t be responsible of us to do
that”.
The bank stuck by its core values
insisting it is not driven purely by profit.
The strategy has paid off for the
bank with retail deposits and loans up dramatically, 177.7% and
234.3% respectively.
Although the retail operating
result was also significantly down 88.8% to €12.2m ($16.3m), Hughes
did not want to downplay the outlook for 2010.
Margins under
pressure
“In our view [the loss in operating
result] is part of being where we are in the cycle. There’s no
doubt margins are under pressure and that feeds through to profit
but we have still continued to acquire and grow the balance sheet,”
Hughes said.
“We have made year-on-year
improvements to bad debt and into operating cost. I would be
expecting those things to continue into 2010.”
The bank said it wants to achieve
comparable lending and deposit volumes for the next financial
year.
Hughes said the bank is “extremely
keen” on the lending side and is looking at pushing forward some 80
to 90% loan to value lending, capitalising on their competition’s
lack of drive in the lending sector.
“We have been pretty consistently
leading with terrific mortgage offers, we are growing our balance
sheet and have a significant growth plan for 2010,” Hughes
said.
“There is no point having a great year one and a bad year two –
it is about sustainable growth.”
