Bank Transfer may be too far
IF Lloyds is getting queasy about the sell-off of 'Project Verde' what about its preferred bidder?
Last week's unscheduled announcement that the EU-mandated sale of 632 branches had been delayed, together with the insistence that a flotation of Verde is being actively pursued, was widely seen as a shot across the bows of the Co-operative, which yesterday published its annual results.
The Co-op's results statement only made a passing reference to Verde alongside the figures which showed that the society's banking operations returned flat profits of AUD$308.58 million.
But Co-operative group chief executive Peter Marks admitted that the transaction was proving 'complex' for a number of reasons, not least regulatory. Heads of agreement were due to have been signed yesterday. Lloyds last week said an announcement was now not expected until the second quarter.
Mr Marks yesterday mounted a robust defence of the Co-op's position: "This is a carve-out of a very big business. That means we need to take time.
"I think we've all seen what happens when banks don't take enough time to do things. We are not going to be bullied or harassed by anyone into doing this quickly."
All the same, a decision is still going to have to be made within weeks, not months, and the regulatory complications are not encouraging. Co-op Bank has 345 branches as well as the online bank Smile and is still integrating Britannia building society, two years on from its acquisition. Mr Marks said that the society is 'ahead' based on a three-year integration plan.
A deal to buy Verde, however, would be of a different order, more than doubling Co-op Bank's size and potentially creating a genuine challenger to the existing high street players. The new-look Co-op Bank would also account for more than 50 per cent of the Co-operative Group, which could be a problem. The Co-operative board is made up of ordinary individuals elected by regional societies; they include a plasterer, a nurse, a retired publisher. That might not be such a bad thing given the lamentable performance of more conventional non-executive directors in overseeing British companies.
But are they the sort of people who would get through the FSA's "intrusive" screening of directors of banks? The bank has not publicly settled on a chief executive. Or a finance director. Acting boss Barry Tootell, the former finance director, and James Mack, acting finance director, may have to be replaced if the deal goes ahead.
Mr Marks is not best pleased about such questions, which are being raised in City circles. He pointed out that Co-op Bank has its own board, made up of more conventional bank directors.
And he added: "We have run a bank for over 100 years. It is also profitable. During the financial crisis a lot of banks governed by professional bankers collapsed and ran to government for a bail-out. Co-op came through the crisis without any crisis. To question our ability is patent nonsense. This is a major deal and it would be a major step-up for us.
"Therefore the Financial Services Authority are quite rightly scrutinising it closely. If we can't satisfy the FSA then I don't want to do this deal. So we are taking our time and doing a very thorough job."
Financially, the Co-op's banking arm is in reasonable health. The company has an enviable loan-to-deposit ratio of 94 per cent, meaning for every $1 in deposits taken in the bank lent out 94c. So, in theory, no requirement for any wholesale funding. That is an improvement on last year's 103 per cent. Its tier one capital ratio of 9.6 per cent is a shade lower than the big high street banks, all of which have more than 10 per cent.
What the bank does not have is the ability to tap the equity markets for cash if funding gets tight although Mr Marks says Co-op is closely involved in discussions with mutuals across Europe about the creation of a new funding vehicle that could rectify the situation.
But he refused to comment on how the purchase of the Lloyds branches might be paid for. Using debt could prove controversial. Mr Marks insists Co-op remains "well within our lending covenants" and is proud of the fact it was able to secure AUD$3 billion to fund the acquisition of Somerfield, the grocer, and refinance the group in the middle of 2008 with the financial crisis in full swing.
But with AUD$2.14 billion of debt on its books, having to take more on might concern the FSA.
The EU deadline to get this done is the end of 2013. Beating it could prove sticky. Royal Bank of Scotland's more conventional sale of just over 300 branches to a more conventional bank (Santander) is a year behind schedule. Analysts are beginning to bet on that flotation.
Nic Clarke, at Charles Stanley, said: "I think the FSA is worried not only about the depth of management experience at the Co-op but also whether the Co-op will have the systems to cope with the transfer and running of the additional branches and customers. I donit think it is a big negative for Lloyds as it has other options (IPO etc)."
Meanwhile, NBNK, the Aim-listed vehicle created to run a new simple bank by former Lloyds chairman Lord Levene, is watching closely. It has a board in place, and equity. But Lloyds made Co-op the preferred bidder claiming it posed less "execution risk" as an established operator. NBNK could surely match its price. Its problem might be Lloyds' pride.