'Times they are a Changin' at the Co-op

As Bob Dylan is unveiled as the new weapon in the Co-ops campaign to show that ‘Times are a changing’ changes continue apace. In December, members of Lothian and the Borders Co-op voted to join the Co-op Group coming quickly after the takeover of Summerfield further enhancing the Groups UK food business.

Now the times are changing in financial services. With the dramatic collapse in confidence of the banks the Co-op and the mutuals have been seen as a safe haven. The proposed super-mutual with the merger of Co-operative Financial Services and the Britannia, the UK’s second biggest building society, creating a new £75 billion business signals the arrival of serious competition for the high street banks.

This merger is possible because of the new Butterfill Act, an act of parliament sponsored Sir John Butterfill MP allowing different types of mutual to merge. Financial mutuals have not been immune to the recession and the credit crunch but so far mergers have been amongst building societies. With some smaller societies coming unstuck in attempts to copy the aggressive business models of former societies like Northern Rock.

The Britannia is not in this category despite this credit rating agencies Moody’s and Fitch have downgraded the Co-op’s position to negative suggesting that the new group will be more exposed to wholesale funding markets. You may think that this is a bit rich coming from agencies that failed to warn of the credit crunch but this deal will weaken slightly the historically strong deposit to loan ratio of the Co-op and increase exposure to Britannia’s larger proportion of wholesale funding. There is little risk however for the 3 million Britannia members who will join the Co-op Group which pays out an annual dividend offsetting any risk to their annual loyalty bonus and it is these members who will be voting on the deal.

Both parties argue this is a merger from strength. Britannia has been a champion of mutuality offering better returns to its members. The new business has the potential to offer an even better service. For Co-operative Financial Services (CFS), formed from, the Co-op Bank, Smile the Internet Bank and Co-operative Insurance, this is good news. There has been some painful restructuring at CFS particularly in the insurance business (CIS) where big changes in adjusting to the world of online and telephone services and fewer home visits led to a number of job losses. Today’s CFS and Britannia make a good fit with remarkably little duplication in the two businesses offering huge potential for cross selling. They are committed to working with all recognised trade unions to effectively manage any changes but the £75 billion merger is projected to generate a modest £60million of cost savings good news for the workers in each organisation.

Britannia CEO Neville Richardson, and proposed CEO of the new Group says that, "This proposed merger offers a unique opportunity to create a new force in British financial services – strongly capitalised and with the scale to offer customers a full range of products and services that are ethical, mutual and co-operative”.

With over nine million customers and 350 branches this will lift the Co-op from a niche player to a high street fixture. Statistically you are more likely to get divorced than to change banks yet even before this merger 2008 saw a 65% increase in customers transferring their current accounts to the Co-op and a 40% growth in retail savings. With banking giants like HBOS and RBS shrinking before our eyes this is a golden opportunity for the Co-op to make a concerted pitch for their customers.

David Anderson Chief Executive of the CFS has described this merger as “transformational not just for the co-operative movement but for the UK Financial services sector as a whole.”

This is going to be a tough year for everyone in financial services but as Andrew Hill wrote in the Financial Times, “Britannia members should not hesitate to vote for the deal. They won’t get a windfall or an upfront payment those days are long gone. Membership of the Co-op offsets any small risk to their annual dividend posed by exposure to deadbeat buy-to-let landlords. Throw in the kudos of being joint pioneers of legislation aimed at bringing different mutuals together and the result is a rare warm glow at the heart of a very chilly financial services sector.”