Co-op threat to pull out of £1bn acquisition of Lloyds branches

Reacting angrily to suggestions that the Co-op lacks the financial clout to run an enlarged bank business, Co-op chief executive Peter Marks said that the group has successfully run a bank for more than 100 years and, unlike some of its rivals, it has not needed a Government bail-out during the downturn.

Bradford-born Mr Marks said: “We will not proceed with this deal unless we are confident it is in the interest of members.

“There are a number of regulatory and economic issues that we have to be clear about, before we make a transaction.”

The supermarkets-to-funerals business was named preferred bidder for the branches, but regulators are reportedly concerned by a lack of banking expertise on its board.

A Financial Services Authority source said there are worries that the conglomerate lacks the experience to manage one of the country’s biggest banking networks.

Mr Marks’s comments came as the wider group revealed a 5.8 per cent fall in pre-tax profits to £373m in 2011, with its 2,800-store grocery arm suffering a 2.1 per cent fall in like-for-like sales.

The Co-op, which expanded its small presence in financial services by acquiring the Britannia Building Society, would be catapulted to Britain’s seventh-biggest bank with the Lloyds deal.

Regulators have been looking closely at the bid because of the proposed new bank’s importance to consumers.

The FSA needs reassurances that the Co-op has strong enough capital, an experienced board and adequate systems and business plan before it gives the go-ahead.

The Co-op still needs to appoint a permanent chief executive for its financial services arm and analysts say it would have to tap the bond markets to raise funds for the acquisition.

Talking about a future chief executive, Mr Marks said: “We have plans in process ready if this deal goes ahead and if it doesn’t go ahead.” He declined to name the designated chief executive.

He added that there are no concerns over the Co-op’s corporate governance systems or the company’s funding capabilities.

“This is nothing to do with our ability to run a bank or our governance,” he said, adding the company remains in constructive talks with Lloyds and the FSA.

Regulators have ordered Lloyds to sell the branches as payback for the company’s state bailout by the Government during the 2008 credit crisis, which left taxpayers with a 40 per cent stake in Lloyds after it pumped around £20bn into the bank.

Espirito Santo analyst Shailesh Raikundlia said a collapse of the Co-op deal would only hurt Lloyds’ shares in the short term, as the bank still has a good chance of disposing of the branches, either through an initial public offering (IPO) or a sale to new British banking venture NBNK.

Lloyds has always kept a fallback option of spinning off the assets and then listing them on the stock market through an IPO.

NBNK, which lost out to the Co-op last year in the bid to become Lloyds’ preferred partner in the branch deal, remains interested.

Oriel Securities analyst Mike Trippitt cautioned that NBNK might face the same regulatory concerns as the Co-op.

“This looks like a regulatory own-goal. They want to increase competition in banking, but if you set the regulatory barrier so high, you end up deterring new entrants,” he said.

Mr Marks said the Co-op had put in “a solid set of results against the toughest economic background I have seen in more than 40 years”.

Its 345 branch banking division, which also operates online bank Smile, reported that underlying profits were flat at £201m.

The group’s food business, which expanded through the acquisition of Somerfield and serves 14.5 million customers a week, has suffered problems over the past year integrating new IT systems.

It also faces increased competition as Tesco and Sainsbury’s open large numbers of convenience stores.

But the group said sales are on an improving trend after a difficult first half of the year, with sales down by just 0.2 per cent in the final quarter.

The group said the falling sales reflected the squeeze in consumers’ incomes as wages fail to keep up with high inflation.

“Consumers have been assailed by rising costs, credit squeeze and uncertainty about the future to an extent unparalleled in recent times,” said Mr Marks.

[email protected]