Co-op, not the consumer, is the real winner from the Lloyds deal

Co-op Bank has just bought 632 branches from Lloyds Banking Group.

It’s being hailed as great news. It will bring a bit of long overdue competition to Britain’s cosy banking market, say the optimists, which might just shake things up among the complacent big players.

It’s certainly good news for Co-op. As well as all those new branches, it will take on 4.8 million new customers, £24bn of assets and £24bn of liabilities. Meanwhile, its share of the current account market will grow to 7%.

At the price it’s paying, that looks like a good deal. Co-op will issue £350m of new debt that will be fully underwritten by Lloyds. It will pay a further £400m (in present value terms) dependent on how well the business does in the future. And Lloyds will put £1.5bn of equity into the business before selling it.

So the Co-op is paying £750m for a business with £1.5bn of equity – or half book value. Of course, Lloyds could argue that it got a good price: its whole business is currently valued by the stock market at just 0.45 times book value.

However, unlike outside investors, hopefully the Co-op will have some idea about the quality of the assets it’s taking on and can come to a better judgement on what they are worth.

What this does tell us though is that people don’t want to pay a lot of money for bank assets. Given the state of the banking system and the UK economy this seems quite sensible. We don’t fancy banking stocks ourselves.

But enough about Co-op. What does it mean for consumers? Will they be better off?

There’s certainly no doubt that more competition is needed after the last Labour government allowed (or forced depending on your view) Lloyds to buy Halifax. But it’s not clear that anything will change much.

At a time when banks are seen by many as doing little for society, the Co-op is lauded as being something different. Not owned by shareholders, it says it is free to do the right thing by its customers and put something back into communities. This may be true, although it still had to make a £90m provision for mis-selling PPI insurance last year.

And compared to Lloyds, which has a loan book 30% bigger than its deposit base, the Co-op is more prudently financed with a loan to deposit ratio of 94%. In other words, its deposits more than cover its loans.

It has no exposure to dodgy eurozone government bonds, nor to investment bankers getting paid lots of money to gamble with other people’s. Having more high street branches with this kind of set up might be enough to get some people to shift their money away from the big banks.

But what will they be getting in return? Scour the best buy tables for savings accounts and mortgages and you’ll struggle to find the Co-op. Britannia Building Society – owned by the Co-op since 2009 – has some reasonable rates on its fixed-term bonds but that’s about it.

Competition in the banking market is only going to make a difference to consumers if someone starts to offer higher rates to savers and lower rates to borrowers. This is unlikely to happen for two reasons.

Firstly, higher rates for savers would be passed on to borrowers who might start to struggle to meet their interest payments. Secondly, lowering lending rates would squeeze profits (the spread between income received from borrowers and income paid out to savers would fall). Despite its ethical stance, even the Co-op has to make a profit.

Sure, you can offer a better customer experience and a better attitude, which is no bad thing in itself – although internet banks like First Direct have a good reputation for this as well.

But the levels of debt in the UK banking and household sector means that lower prices for banking customers looks some way off. As a result, this may be a better deal for the Co-op than British consumers.

12 Responses

  1. 20/07/2012, Beebs wrote

    At least the Co-op won’t have to fork out for multi million pound executive bonuses? With their loan ratio they shouldn’t need a bail out either, that has to be good!

  2. 20/07/2012, Jonathan wrote

    Frankly, as a Lloyds customer, I’m delighted. Lloyds’s city slicker financial practices has made my savings vulnerable; now they’ll be safe with the co-op.

    So I’m a happy.

    And even happier because I’ll get dividend payments from the bank (to add to the ones I get from my local co-op).

    The key of quality for me is how the new bank deals with customers who go through times of financial hardship because they’ve lost their jobs – not how much they offer investors.

  3. 20/07/2012, Tomahawk wrote

    Being a coop bank customer is no bed of roses.

    Service levels have plunged the depths in recent years.

    They are to date an noncompetitive niche player only.

    Will Coop be able to change the Lloyds culture and compete? nah…

    We will be just back to the ‘big 5′…about where we were in the mid 1980′s the coop will become Lloyds slowly but surely… mark my words…

    What is needed is a return to much smaller regional not for profit banks… As has been shown by this financial meltdown Retail Banks are merely extensions of the state. They need to be regulated and controlled as such. The Thatcherite experiment has failed. Lets move on and get back to real world economics not fantasy economics.

    These megacorporations serve nobodies best interests, except their own.

  4. 20/07/2012, CHRIS wrote

    Bearing in mind co ops rip off prices for the food it sells compared to the opposition you are probably right, the customer won’t be getting a bargain.

  5. 21/07/2012, Tigernaut wrote

    Got to be a good thing. I’ve banked with Smile, the Coops internet bank for many years for no problems at all. Which has been complimentary about Smile for many years too. I’ve also been able to use the Post office to withdraw and pay in free of charge. I hope this arrangement is not foregone with the increase in the branch network.

    They are not the cheapest but nor are they so out of line with competition. Look at the supermarkets, yes the prices can be more expensive than your Tesco or Sainsbury but the meat quality is excellent and many offers do have items cheaper than the big boys. You just need to check now and again and I think you will be surprised.

  6. 21/07/2012, Mike wrote

    I am surprised at the notion that this is good for banking. So far as I can see Lloyds are underwriting the sale, it will be called TSB (a Lloyds brand), and it will be Lloyds staff managed by Lloyds management. The current Coop CEO Isn’t a banker so. Lloyds guy will head it up. Looks like smoke and mirrors to me.

  7. 23/07/2012, Tom wrote

    Co-op Bank is in the process of moving its customer service telephone numbers from 0845 to 0844 (revenue-generating). Nuff said.

  8. 24/07/2012, James wrote

    @ Post #4 CHRIS: Bear in mind that ethics comes with a price tag attached… The big supermarkets achieve cheap prices by using intensive farming methods, poor animal care standards and ripping off small farmers (ie milk pricing).
    I for one am happy to pay a little more for my food knowing the co-op dont do the above… The same ethos applies to their banking services – they might not have the best rates for savings and mortgages (and certainly not the worst either) but your money is safe (something that would have appealed to lots of Northern Rock customers circa 2008) and profits are returned to customers and not used to fund unsustainable bonuses or invested in suspect businesses (ie arms production)

  9. 24/07/2012, Richard wrote

    BANK OF DAVE!!! Dave Rigglesworth on last evenings program playing the markets and giving savers 5% up front on savings pledged for 12 months then lending to local business that banks would not lend to (98% fully paid off) still made 3-2% in 6 months as appose to banks giving saver`s 1/2% per anum so it shows how greedy big banks are lets hope he rolls out over the country and not just Bradford so that we the small fry get a much better deal and the big banks have to start being more competitive

  10. 25/07/2012, John Pendrey wrote

    On the Isle of Barra the CO-OP is our only ‘Supermarket’ The management at all levels do not respond to their captive customers. They say one thing but don’t deliver the goods. We are a convenience store for them and we have wrong range and high prices. I hope they do better with banking.

  11. 25/07/2012, Jamesthe1st wrote

    Hmmm, check out Coop’s property portfolio following its acquisition of Britannia, or their dabble with MBO leveraged deals. It ain’t pretty, in fact it’s like every other bank!!! They don’t include that in their ethical marketing guff.

    And If I remember rightly, wasn’t it the oh so ethical Coop who put Dairy Farmers of GB out of business?

  12. 03/08/2012, Brian wrote

    I’me old enough to remember the carpet baggers, trying to get prudently run financial businesses to change. Despite opposition from many their foolishness has resulted in many closures. Now we pay the bill for the failure to follow ‘prudent’ policies. We need to ensure regulators are not bankers, or retired treasury officials, but impartial free thinkers.

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