CO-OPERATIVE BANK PLC The Co-operative Bank plc announces that the following document has today been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM:
Annual Report and Accounts 2016.
A copy of the Annual Report and Accounts 2016, Pillar III Report 2016 and an investor presentation are available within the Investor Relations section of our website www.co-operativebank.co.uk/investorrelations.
This announcement also contains additional information for the purposes of compliance with the Disclosure and Transparency Rules, including a consolidated set of financial statements, principal risks and uncertainties, details of related party transactions and a responsibility statement. This information is extracted, in full unedited text, from the Annual Report and Accounts 2016. Reference to pages and numbers refer to page numbers and notes to the 2016 Annual Report and Accounts and 2015 comparatives are as restated in those accounts.
Certain termsThe term the 'Bank' means The Co-operative Bank plc together with its consolidated subsidiaries. The term 'Company', refers to The Co- operative Bank plc. In this report the abbreviations '£m' represent millions of pounds sterling, and '£bn' represents billions of pounds sterling. Unless otherwise stated, the income statement analyses and compares the 12 months to 31 December 2016 to the corresponding 12 months of 2015. The balance sheet comparisons relate to the corresponding position as at 31 December 2015. Unless otherwise stated, all disclosed figures relate to continuing operations. Relevant terms that are used in this document but are not defined under applicable regulatory guidance or International Financial Reporting Standards (IFRS) are explained in non-IFRS measures below.
Non-IFRS measuresCertain non-IFRS measures are provided within this report. These can be found mainly (but not exclusively) in the Detailed Financial Review and the Key Highlights page.
Forward-looking statementsThis announcement, including information included or incorporated by reference in this announcement, contains certain forward looking statements with respect to the business, strategy and plans of the Bank (including its 2017-2021 Strategic Plan or the "Plan") and its current targets, goals and expectations relating to its future financial condition and performance, developments and/or prospects. In particular, the Strategic Update in this announcement includes forward-looking statements regarding a proposed additional CET1 capital raising, the Bank achieving CET1 ICG compliance from 2017 onwards and an anticipated £250 million Tier 2 debt issuance in 2018 and further MREL qualifying debt issuances in 2020/2021. By their nature, forward looking statements involve risk and uncertainty because they are based on current plans, estimates, targets, projections, views and assumptions and are subject to significant inherent risks, uncertainties and other factors both external and internal relating to the Bank's Plan, strategy or operations, which may result in the Bank being unable to achieve the current targets, predictions, expectations and other anticipated outcomes expressed or implied by these forward-looking statements. In addition, certain of these disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations, including assumptions and estimates made by management. Accordingly, undue reliance should not be placed on forward-looking statements.
There are a large number of important factors which could adversely affect the Bank's operating results and financial condition, the Bank's ability to implement its Plan and cause the Bank to miss its targets or affect the accuracy of these forward-looking statements. These include risks and uncertainties summarised in the 'Principal Risks and Uncertainties' section of the Bank's Annual Report and Accounts for the Financial year ended December 2016, in particular the risks and uncertainties summarised under the sections titled 'Background and the Bank's Plan' and 'Anticipated Regulatory Capital Requirements'.
The Bank does not assume any obligation to, and do not intend to, revise or update these forward looking statements, except as required pursuant to applicable law.
No offer of securitiesThis announcement is not, nor should be construed as, an offer of, or solicitation of an offer to purchase or subscribe for, any securities to any person in any jurisdiction. In particular, this announcement does not constitute an offer for sale of, or a solicitation to purchase or subscribe for, any securities in the United States. No securities of the Bank have been, or will be, registered under the US Securities Act of 1933, as amended (the "Securities Act"), and securities of the Bank may not be offered or sold in the United States absent an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States.
The Co-operative Bank plc9 March 2017
Annual Report and Accounts for the full year ended 31 December 2016 Key Highlights Statutory loss before taxation, still impacted by legacy issues, has reduced to £477.1m in 2016 compared to a loss before tax of £610.6m in 2015Adverse impacts include a reduction in net interest income, an increase in the fair value amortisation associated with the merger with the Britannia Building Society and higher remediation and strategic project costs.
Favourable impacts partially offsetting these adverse movements were: reduced operating costs, lower losses on asset sales, a gain recorded
from the sale of the Visa Europe share and lower conduct charges.
Net interest income decreased by £76.7m to £394.8m (2015: £471.5m) as a result of lower Non-core asset balances, new business asset spreads remaining under pressure due to strong competition in the mortgage market and to a lesser extent, the impact of the reduction in the Bank of England base rate.
Conduct and legal risk charges reduced by £168.8m to £24.9m as the conduct remediation programme has substantially completed. The main driver of the charge in 2016 relates to £36.0m for PPI, which was partially offset by other provision releases.
Remediation and strategic project costs increased to £275.6m in 2016 (2015: £216.2m), reflecting the transformation required to address the historic under investment in systems and processes. This includes £81.9m expensed in connection with the mortgage outsourcing programme, of which £48.5m relates to assets no longer expected to be in use.
Fair value amortisation associated with the merger with the Britannia Building Society increased by £60.1m in 2016 to £180.5m (2015:
£120.4m), representing 38% of the loss before taxation.
The Bank's Common Equity Tier 1 (CET1) ratio stood at 11.0% at 31 December 2016 (31 December 2015: 15.5%) reflecting a reduction in Risk Weighted Assets (RWAs) of £0.7bn and a statutory loss after tax of £418.7m.
Simplifying of the business and reducing underlying costs continuesTotal operating costs reduced by £47.1m to £444.8m (2015: £491.9m), due to headcount reductions, further rationalisation of the branch network and lower third party costs.
Operating staff costs have decreased year on year by £30.3m to £187.7m (2015: £218.0m). FTEs (including contractors) have fallen by 809 from 4,704 to 3,895.
59 branch closures completed in 2016, reducing the network to 105 branches.
Successful migration of the Bank's core mainframe system to the new IBM managed environment completed in February 2017.
Rebuild of the retail franchise is gaining tractionMortgage originations continued to increase with completions totalling £3.1bn in 2016 (2015: £2.8bn), whilst redemptions (excluding contractual repayments) fell to £1.7bn (2015: £2.3bn). Our intermediary channel Platform accounted for 91% of completions and was voted Intermediary Lender of the Year for the second year running at the Your Mortgage awards.
The Retail mortgage book grew by 5% to £14.1bn (2015: £13.4bn), representing 1.1% market share.
Following the launch of our new Everyday Rewards current account, the number of prime current account holders increased by 8,303 to 664,268 (2015: 655,965).
Customer relationship metrics across the Bank remain strong. The Bank's current account Net Promoter Score (NPS) was 17 at the end of 2016. The Bank ranked #4 in current account NPS which emphasises the strong service levels being delivered in contact centres and branches alongside continued improvement in digital channels and customer satisfaction ratings. The Bank has moved back into the Top 50 brands for customer service, climbing 46 places from 2015.
New and improved online banking platform launched in May 2016.
An upgraded mobile app was released in September 2016 and Apple Pay was launched in October 2016.
Continue building differentiated proposition on the expanded Ethical PolicyNew rewards based current account proposition, Everyday Rewards launched in January 2016.
Return to campaigning, in partnership with Refuge, a leading UK domestic abuse charity launched the 'My money, my life' campaign to raise awareness and support of financial abuse.
Focus for 2017Successfully manage the potential sale process and Liability Management Exercise/capital raise, announced on 13 February 2017.
Continue to focus on costs.
Continue to ensure the Risk Management Framework is fully embedded across the Bank and progress IRB models remediation.
Continue investment in the brand and development of products and services which reflect the Bank's customer-led Ethical Policy.
Continue to focus on quality of service.
Strategic UpdateThe Bank's announcement on 26 January 2017 noted that the Bank expected its CET1 ratio (in the absence of any management actions) to fall and remain below 10% over the medium term and that it was unlikely to meet its Individual Capital Guidance (ICG) over the planning period to 2020. In addition, the Bank reported that it continued to expect to meet its Pillar 1 capital requirements and to maintain sufficient liquidity to meet its obligations.
The Bank's announcement on 13 February 2017 noted that the Bank has always been clear that, although it met Pillar 1 regulatory capital requirements and expected to continue to do so, it needed to build its capital and meet longer term UK bank regulatory capital requirements. This announcement continued by noting that its capacity to do so organically had been constrained by (i) the impact of interest rates that are lower than previously forecast, reducing the Bank's ability to generate income, and (ii) higher than anticipated transformation and conduct remediation costs. The announcement also noted that the Bank has also needed to consider enhanced regulatory capital and MREL requirements expected of all UK banks.
As a result, and having concluded its annual planning review, the Bank announced the commencement of a sale process, inviting offers for all of its issued ordinary share capital, and that it was considering ways of raising equity capital from existing and new capital providers and a potential liability management exercise of its outstanding public debt.
As an alternative to a sale, the Bank's Plan seeks to raise an additional £700m to £750m of CET1 resources. Whilst the structure, terms and timing are to be finalised, this may be achieved via a liability management exercise involving the potential exchange of the Bank's debt securities to equity (taking into account the Bank's creditor hierarchy) alongside an additional primary equity capital raise of approximately
£300m to enable the Bank to achieve CET1 ICG compliance from 2017 onwards. Furthermore, assuming the successful completion of such
capital raise, the Bank is anticipating circa £250m Tier 2 issuance during 2018 and further MREL qualifying debt issuances in 2020/21. If all of these measures are implemented as planned, the Bank expects to be fully ICG compliant from 2018 and meet all capital and interim MREL requirements in 2019.
Liam Coleman, Chief Executive Officer, said:
"In 2016, we continued to deliver significant progress against our turnaround plan rebuilding a customer focused retail bank with strong levels of new mortgage business, growing current account numbers and a distinctive ethical brand; but at the same time we faced a number of challenges. The historically low interest rate environment, legacy issues and the cost of the scale of transformation required continued to impact on the performance of the business. Today's results reflect those factors, which led to the Board's decision to commence a sale process and to look at other options of building capital, and they also demonstrate there is clear potential to build our unique franchise in the future.
"Since 2013 considerable progress has been made fixing the problems of the past and the Bank is now in a very different position than it was in 2013 and stronger in many areas. Many of the remediation projects have now largely been completed and we have reached a number of key transformation milestones this year. In particular, the fact we have successfully migrated our key systems to IBM and now meet the regulator's threshold conditions for IT, highlights how much has been done to build the Bank's resilience in this area. Importantly, 2017 marks the year when the fair value amortisation related to the merger with the Britannia Building Society in 2009 comes to a close and when we expect project costs to decline.
"The announcement of a sale and consideration of other options to build capital is therefore about how the Bank sees through the next stage of its turnaround plan. Obviously, we are only a few weeks into the sale process but we are pleased with the interest to date and engaging with potential bidders as planned.
"This is a great retail bank and one that is valued by our 4 million loyal customers. We believe there is opportunity and potential to build on the progress made and on our distinctive ethical position."
Investor CallAn investor call will be held as follows: Date: Thursday 9 March 2017
Time: 9.30 am
Dial: +44 (0) 20 3059 8125
A webcast will also be available at www.co-operativebank.co.uk/investorrelations
An operator will assist you in joining the call.
Investor enquiries:Jonathan Berger, Head of Investor Relations: +44 (0) 7595 567 502
Media enquiries:Lesley McPherson, Director of Communications: +44 (0) 7725 903 270
David Masters, Lansons: +44 (0) 7825 427 514
Tony Langham, Lansons: +44 (0) 7979 692 287
About The Co-operative BankThe Co-operative Bank plc provides a full range of banking products and services to almost 4 million retail and small and medium sized enterprises customers. The Bank is committed to values and ethics in line with the principles of the co-operative movement. The Co-operative Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Co-operative Bank plc customers are protected by the Financial Services Compensation Scheme in the UK.
KEY PERFORMANCE INDICATORS The Key Performance Indicators presented below1 reflect the way in which the performance of the Bank was measured in 2016. As the Bank continues to implement its turnaround, management will continue to review these measures.2016
2015
Change
Notes
Total Bank
Statutory (loss) before tax (£m)
(477.1)
(610.6)
133.5
The Bank's loss before tax in 2016 continued to be impacted by legacy issues. Adverse impacts include the reduction in net interest income, an increase in the fair value amortisation associated with the merger with the Britannia Building Society and higher remediation and strategic project costs. Favourable impacts partially offsetting this are: reduced operating costs, lower losses on asset sales, a gain recorded from the sale of the Visa Europe share and lower conduct charges.
Net interest margin2 (%)
1.39
1.42
(0.03)
Small decrease in net interest margin impacted by competitive
pressures on new asset margins and the reduction in Bank of
England base rate.
Cost:income ratio3 (%)
103.7
100.0
3.7
Cost:income ratio increased as reductions in operating expenditure and operational project expenditure were more than offset by the reduction in interest income.
Common Equity Tier 1 (CET1) ratio (%)
11.0
15.5
(4.5)
CET1 ratio has decreased primarily as a result of the statutory loss after tax.
Leverage ratio (%)
2.6
3.8
(1.2)
Statutory losses have reduced Tier 1 capital at a greater rate than the balance sheet has been deleveraged.
Total RWAs (£bn)
6.7
7.4
(0.7)
Total RWAs have reduced in line with Non-core deleverage partially offset by growth in Core customer assets.
Total capital (%)
17.7
21.6
(3.9)
Total capital ratio has decreased reflecting the reduction in CET1 capital.
Colleague engagement (%)
64.0
66.0
(2.0)
Colleague engagement remains broadly stable as we continue
our cultural change programme.
Core Bank
Customer deposits(£bn)
22.1
22.4
(0.3)
Retail and BaCB deposits.
Customer assets (£bn)
15.3
14.7
0.6
Credit RWAs (£bn)
3.9
3.7
0.2
Total Current Account Holders
1,435,470
1,431,323
4,147
Prime Current Account Holders
664,268
655,965
8,303
Net interest margin2 (%)
1.78
1.89
(0.11)
Non-core Bank
Customer assets (£bn)
4.1
4.9
(0.8)
Credit RWAs (£bn)
2.0
2.8
(0.8)
KPIs are calculated on a management accounts basis as this is how we manage our business.
Net interest margin is calculated as net interest income divided by the average of the opening and closing asset balances for the period.
Operating expenditure and operational projects (including associated depreciation and amortisation) divided by operating income excluding losses on assets sales.
Please see 'Detailed Key Performance Indicators' on page 32 for explanations of why these metrics are important and how they are calculated.
BANK PERFORMANCE - KEY HIGHLIGHTS AND OUTLOOK Statutory loss before taxation, still impacted by legacy issues, has reduced to £477.1m in 2016 compared to a loss before tax of £610.6m in 2015Adverse impacts include a reduction in net interest income, an increase in the fair value amortisation associated with the merger with the Britannia Building Society and higher remediation and strategic project costs.
Favourable impacts partially offsetting these adverse movements were: reduced operating costs, lower losses on asset sales, a gain recorded from the sale of the Visa Europe share and lower conduct charges.
Net interest income decreased by £76.7m to £394.8m (2015: £471.5m) as a result of lower Non-core asset balances, new business asset spreads remaining under pressure due to strong competition in the mortgage market and to a lesser extent, the impact of the reduction in the Bank of England base rate.
Conduct and legal risk charges reduced by £168.8m to £24.9m as the conduct remediation programme has substantially completed. The main driver of the charge in 2016 relates to £36.0m for PPI, which was partially offset by other provision releases.
Remediation and strategic project costs increased to £275.6m in 2016 (2015: £216.2m), reflecting the transformation required to address the historic under investment in systems and processes. This includes £81.9m expensed in connection with the mortgage outsourcing programme, of which £48.5m relates to assets no longer expected to be in use.
Fair value amortisation associated with the merger with the Britannia Building Society increased by £60.1m in 2016 to £180.5m (2015:
£120.4m), representing 38% of the loss before taxation.
The Bank's Common Equity Tier 1 (CET1) ratio stood at 11.0% at 31 December 2016 (31 December 2015: 15.5%) reflecting a reduction in Risk Weighted Assets (RWAs) of £0.7bn and a statutory loss after tax of £418.7m.
Simplifying of the business and reducing underlying costs continuesTotal operating costs reduced by £47.1m to £444.8m (2015: £491.9m), due to headcount reductions, further rationalisation of the branch network and lower third party costs.
Operating staff costs have decreased year on year by £30.3m to £187.7m (2015: £218.0m). FTEs (including contractors) have fallen by 809 from 4,704 to 3,895.
59 branch closures completed in 2016, reducing the network to 105 branches.
Co-operative Bank plc published this content on 09 March 2017 and is solely responsible for the information contained herein.
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