Co-op, not the consumer, is the real winner from the Lloyds deal
Phil Oakley Jul 20, 2012
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.
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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.