Annual Result Highlights for The Co-operative Financial Services (CFS) for the year ended 10th January 2009

Annual Result Highlights for The Co-operative Financial Services (CFS) for the year ended 10th January 2009

CFS re-affirms the strength of the co-operative renaissance with a strong, resilient trading performance in 2008”
Business Highlights

On a like for like basis total shareholder profit before tax was £147.0m (2007: £155.4m)*

Key points:

Very strong trading performance in the banking business with profits increasing by 70% to £85.6m (2007: £50.4m). Income up, bad debts down, operating costs down despite difficult market conditions.
Improved second half performance enables general insurance to achieve full year operating profit of £8.4m (2007: £67.1m) despite investment losses
Record dividend paid to CFS’s parent The Co-operative Group of £72.1m to support member dividend and social goals programme (2007: £39.9m)
Market leading levels of customer satisfaction achieved in both banking and insurance areas
Major sales increase in financial services as consumers find trust and value in “The Co-operative” brand
Over 140,000 CFS customers recruited as members of The Co-operative Group during the year, an increase of 33% compared to 2007.
The Co-operative Asset Management launched to develop 3 rd party investment management business
Leading position in Corporate Social Responsibility maintained as CFS is named “Company of the Year” by Business in the Community
Announcement of proposed merger with The Britannia Building Society which will further accelerate momentum within the mutual & co-operative sector.
* Total shareholder profit before tax, short-term investment fluctuations, significant items, FSCS levy and membership dividends. The long-term business is transacted on a mutual basis with all profits retained for the benefit of policyholders

CFS Financial Highlights

The banking business recorded an operating profit before tax, FSCS levy and significant items of £85.6m (2007: £50.4m). Income up, bad debts down, costs down despite difficult market conditions.
General Insurance business achieved a profit of £8.4m despite investment losses in turbulent market conditions.
Other shareholder profit activity (excluding short-term investment fluctuations) was £53.0m (2007: £37.9m)
Bank net revenue increased by £45.9m (8.8%) with an increase in net interest income of £39.5m and an increase of £6.4m in non-interest income.
Bad debts fell to £96.8m (2007: £102.0m).
General Insurance claims ratio was 69.2% (2007: 64.3%).
New Business Performance

There has been a dramatic increase in the level of new business as consumers resonated with the strength and security provided by The Co-operative brand during the dislocation of markets created by the credit crunch:

Retail customer deposit balances increased by 17%
Retail mortgage balances increased by 24%
Corporate deposit balances increased by 27%
Corporate lending balances increased by 23%
New Motor insurance sales increased by 34%
New Home insurance sales increased by 29%
David Anderson, CFS Chief Executive, Commentary:

“These are solid business results and when considered against the global economic crisis, they reflect the strength, relevance and importance of the Co-operative business model.

“We measure success in a much broader and deeper way than those competitors whose primary goal is to maximise profit for their shareholders. Our motivation lies in growing our business and achieving profit that can sustain financial and social benefit for members, colleagues and local communities alike.

“In 2008 the strength of our balance sheet enabled us to lend far more money, insure more homes and support more social causes than we did in previous years – without support from the government.

“We now need to build upon the success of 2008 and this momentum will be accelerated with our proposed merger with Britannia Building Society. Both businesses entered into talks from clear positions of strength and a shared set of values. I genuinely believe that a vote in favour from Britannia members this month would be transformational, not just for the mutual and co-operative sector, but for the UK financial services sector as a whole”.

CFS Operating Highlights


Operating profit before tax, FSCS levy and significant items increased by £35.2m (69.8%) to £85.6m despite higher wholesale investment impairment losses, as strong balance sheet growth was achieved in both lending and deposit balances.

The strong sales performance in retail banking has been supported by the development of award-winning and market leading products. Customer deposit balances increased by 20% to £10,632m during 2008 (2007:£8,887m) and now represent 107% of customer lending (104% at end of 2007).

The retail banking division achieved significant growth in mortgage lending balances of 24% as the Bank was able to fund its increased secured lending as a result of the strong growth in customer deposits. The total value of mortgage completions was up by 64% (£807m 2007 compared to £1.3bn in 2008). This growth was achieved without compromising the quality of the portfolio as average loan-to-value over the last twelve months remained constant at 53%. The quality of the Bank’s assets was further illustrated by a year on year fall in bad debt figures.

There was also a strong move in terms of new current account sales which helped to increase the total number of current accounts held by over 75,000 (2007: approx 31,000 increase). A combination of brand strength in The Co-operative, new product launches and customers actively switching from the large government-supported banks contributed to this trend, which has continued into 2009.

The Bank maintained a strong balance sheet position with consistent robust liquidity and capital ratios. As at year end, the capital ratio on a Basel II basis after regulatory deductions was 11.2% with a tier 1 ratio of 8.3% and a core tier 1 ratio of 7.6% reflecting the quality of capital resources. These ratios increase by 1.3% after inclusion of £120m new equity provided after the year end from CFS’s own resources.

The Corporate Banking division has made a major contribution to the strong growth in operating income, driven by a marked increase in customer lending and deposits, up by 23% and 27% respectively. The growth in corporate lending balances included participation in PFI transactions.

In the wholesale business improved underlying sector performance reflected the Bank’s balance sheet strength which enabled it to take advantage of conditions in the money market, including rapidly declining interest rates in the second half of the year, which resulted in significantly improved margins.

The Renewable Energy and Asset Finance team has also been involved in funding a variety of renewable energy investments from hydro schemes, to wind farms and combined heat and power plants. These schemes have established the Bank as a significant force within this market.

The growth in corporate lending has been controlled to maintain margins, high credit quality and liquidity. We have continued our expansion in the number of corporate banking centres with six new centres opening in Altrincham, Southampton, Chelmsford, Edinburgh, Cambridge and Glasgow taking the total number of centres to 20. This development has enabled the bank to grow its corporate customer relationship base in business communities where it has not previously operated.

General Insurance

The General Insurance business achieved a profit of £8.4m (2007: £67.1m) despite investment losses of £26m in the turbulent market conditions. In addition 2007 benefited relative to 2008 from the net impact of reserve releases partially offset by weather related claims costs. Excluding the one off claims impacts, the underlying claims ratio was similar for 2008 and 2007.

Sales volumes increased significantly in 2008 whilst retention rates also improved, reflecting the strength of the brand and the significant investment made in customer service improvements. At the same time The Co-operative Insurance continued to broaden its distribution capabilities through the launch of the motor insurance product onto two further aggregator sites ‘Go Compare’ and ‘Compare the Market’. Both these sites have witnessed strong sales performance and plans are in place to develop this channel further.

February 2008 also saw the launch of a new modular motor insurance product within the customer contact centre and on The Co-operative Insurance website. The new product allows customers to tailor their insurance to their individual needs.

This change in the distribution mix, combined with a lower risk customer profile led to the Gross Written Premium (GWP) planned decrease of £18.4m to £394.4m. The General Insurance claims ratio at 69.2% was broadly in line with expectations and compared to 64.3% in 2007. A number of initiatives were launched through 2008 aimed at improving operational efficiency, including a review of best practice in terms of case estimating and an on-going challenge to improve speed of settlement.

The major investment within our general insurance business has had a positive and significant impact on customer satisfaction levels. At December 2008, the General Insurance customer satisfaction score stood at 78.5%, an increase of 3.1% compared to December 2007 (75.4%). This is a major achievement and places The Co-operative Insurance amongst the highest ranking performers within its sector.

Long Term Business

Profitability of new business increased with the Present Value of New Business Premiums rising by 1% to £468.0m. With customers now taking a more cautious attitude to risk during the year this led to higher sales of single premium investment bonds and lower sales of pure equity-based unit trusts.

Gross earned premiums for life and pensions business in 2008 was £497.9m compared to £534.2m for the corresponding period last year. The fall in gross premium is due to a reduction in regular premiums from in-force with-profits business as policies reached maturity or retirement, partly offset by new business.

The amount of money managed on behalf of long-term customers fell from £19 billion to £17 billion, as a result of the negative returns in the period and the reduction in the with-profits portfolio.

The Co-operative Asset Management was launched during 2008; a new specialist fund management brand used to market unit trusts, including Sustainable Leaders, Income with Growth and UK Growth, to the corporate and intermediary markets.

The CIS Sustainable Leaders Trust, The Co-operative Investment’s flagship Socially Responsible Investment (SRI) fund, recorded first quartile performance for the last twelve months. Despite tough economic conditions, the performance of the UK Growth and UK Income with Growth trusts produced favourable performance compared to their peer group, due in particular to the funds being underweight in the UK banking sector throughout 2008.

During 2008 the initiative to expand the distribution of Unit Trusts to IFA’s and other intermediaries continued which will present exciting opportunities for The Co-operative Asset Management over the medium to long term.

Customer Satisfaction

With confidence in the financial services industry heavily undermined by the effects of the credit crisis and economic downturn, the continued investment made by CFS in its core service areas actually strengthened customer relationships throughout the year. This was evidenced through a series of prestigious customer service awards won by CFS.

The Co-operative Bank and smile were judged ‘best high street’ and ‘best on-line’ provider by Which? The People’s Choice report from Which? also awarded smile the highest customer satisfaction score for current accounts. The Co-operative Bank was also named as the ‘Best Customer Service provider’ by the leading research company JD Power and smile and The Co-operative Bank took 2 nd and 3 rd place respectively for customer satisfaction in a BBC Watchdog consumer survey.

The Co-operative Insurance was voted ‘Best On-line Motor Insurance Provider’ by Your Money and The Co-operative Bank won ‘Best Re-mortgage’ and ‘Best First-time buyer’ at the Moneywise Mortgage Awards.

Brand, Membership & Social Responsibility

CFS has continued to strengthen its global position as a leader in corporate social responsibility and in 2008 was awarded the prestigious ‘Company of the Year’ award by Business in the Community for its impact on society. For a UK financial services business to win such an accolade, given the prevailing climate re-enforces the strength and broader purpose of the Co-operative business model.

The Co-operative Bank took third place and was the highest ranking financial services company in the Sunday Times Best Green Companies Award. The Bank was also ranked 7 th improving from 8 th place in 2007, in the UK Ethical Reputational Index and was rated the highest ranking financial institution within the index.

Highlighting the importance of our wider social goals agenda, CFS won the prestigious Financial Innovation Award for ‘The Best Corporate Social Responsibility Programme’ specifically demonstrating social inclusion across many areas.

At the heart of CFS lies our unique ethical policies which support the banking, insurance and investment operations. The ethical policy remains core to how the Bank business is managed and since 1992 the Bank has turned away £1bn worth of corporate loans from business that directly conflict with our customers’ concerns. However over the same period, the Bank’s total commercial lending has grown from £571million to over £4.2 billion, representing an average of 13% per annum – a clear demonstration that ethics can deliver a sustainable business model.

During the second half of 2008 the Bank consulted its customers on a new mandate for The Co-operative Bank Ethical Policy with over 80,000 responding. Following an overwhelming mandate from customers the Bank will now decline finance for fuels with particularly high global warming potential, cluster bombs or activities that involve the exploitation of great apes.

2008 saw the launch of the new financial services identity under the three consumer facing brands of The Co-operative Bank, The Co-operative Insurance and The Co-operative Investments. The highly successful launch saw the brands promoted on national TV for the first time in 13 years and prompted a dramatic increase in Brand consideration. Based on the brand essence ‘good with money’, the campaign emphasised the core messages of Value, Fairness and Social Responsibility. The external campaign was supported by unprecedented investment internally, where all financial services colleagues participated in a ground breaking ‘good with money’ experience - truly embedding the brand in the day to day life of the business.

More recently 2009 has seen the launch of the Group’s masterbrand campaign which promotes the entire family of The Co-operative Group’s businesses, over 4500 outlets in total. This is a significant investment in brand awareness will benefit the financial services brands as well as support the wider renaissance of The Co-operative across the UK.

CFS launched a new ‘in store’ banking pilot to test delivery of banking and insurance facilities within The Co-operative Food stores and much closer working with other Group businesses have helped Group membership grow to over 3 million members and CFS as part of this, recruited over 140,000 new members in 2008.

Britannia Building Society

In early 2009 the CFS and Group Boards recommended plans to merge with the Britannia Building Society. The merger is still subject to a vote from Britannia members in April 2009 who will become members of The Co-operative Group should they accept the proposal. The merger will strengthen our capacity to provide a much broader range of products and services to customers and members now looking for an ethical alternative to shareholder and government-owned banks and financial services institutions. This exciting development which combines two strong organisations, will create a powerful new Supermutual force in financial services. It will also accelerate further the renaissance of The Co-operative Group, which continues to go from strength to strength following the merger with United Co-operative and the recent acquisition of Somerfield.

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