Co-Op chief riding high

PETER Marks was quietly going about his normal business on Wednesday lunchtime, catching up on trading figures from his rather dowdy 12th-floor executive suite, when he received a call that would throw his day into turmoil.

The plain-speaking Yorkshireman thought he had a day to clear his in-box before a crucial announcement on Thursday from Lloyds Banking Group on who had won the bidding battle for a package of assets it was selling under orders from the European Commission.

Lloyds was expected to reveal the winner after a two-day board meeting, but the taxpayer-backed institution took the City by surprise when it sent word at 1.24pm on Wednesday that a hastily arranged conference call would take place within 20 minutes with its chairman Sir Win Bischoff and acting chief executive Tim Tookey.

They announced that their absent chief executive Antonio Horta-Osorio would return to his job and that the Co-operative Bank had beaten off a challenge from Lord Levene’s NBNK acquisitions vehicle as preferred bidder for 632 Lloyds branches and other businesses.

Marks, who was in his office at the Co-op’s dated 1960s headquarters at New Century House in Manchester, had been confident of a positive outcome following months of meetings with Lloyds and a raft of policymakers. He immediately sent word to his communications chiefs Russ Brady and Patrick Tooher to issue a statement they had been preparing to release on Thursday in the event that the decision went the Co-op’s way.

While Bischoff and Tookey were fielding questions from financial hacks about the health of Horta-Osorio – who is set to return on 9 January following a two-month leave of absence through exhaustion – Brady and Tooher were frantically dotting the i’s and crossing the t’s on the Co-op’s statement.

Although Marks stressed that the agreement was “non-binding” and that the 167-year-old mutual could walk away from the exclusive discussions at any time, the keen amateur musician from Bradford found it difficult to mask his excitement.

If the landmark deal goes through, the Co-op will become the seventh-largest bank in the UK. The sale will mark a particularly radical shift for the Scottish banking market, where the Co-op Group is well known for its food stores and other eclectic services – including funeral parlours – but has a minor banking presence.

It has made some headway in business banking after opening a corporate banking centre in Edinburgh in March 2009, but its Co-op Bank division has only four branches north of the Border.

Of the 632 branches which Lloyds is being forced to sell as a condition of receiving rescue funding from the state, 185 are in Scotland and are operated under the Lloyds TSB Scotland brand.

According to market share data seen by Scotland on Sunday, the deal would overnight elevate the Co-op to the position of third most powerful bank in Scotland. In branch terms, it would be behind Bank of Scotland, with 295 high-street outlets, and Royal Bank of Scotland, which has more than 300. But the addition of Lloyds TSB branches would put it ahead of the Clydesdale Bank, which has about 150, assuming it keeps them all open.

On the current accounts front – considered to be the most meaningful measure of market share – RBS and Bank of Scotland are estimated to each hold around 23 per cent of the market, Lloyds TSB Scotland 16 per cent, while the Clydesdale Bank and Santander lag behind on 10 per cent and 8 per cent respectively. The Co-op is included as “others”.

Sources at the Co-op say the Scottish assets were one of the “key attributes” of the deal, and the possibility of another powerful player entering the Scottish market is particularly welcome news for small businesses, which have long complained of a “duopoly” held by RBS and Lloyds/Bank of Scotland. It is hoped that the Co-op, which has a good reputation among SMEs, will be able to make great strides towards making the small business lending market in particular more competitive.

Andy Willox, Scottish policy convener of the Federation of Small Businesses, said: “For years, the FSB in Scotland has been campaigning for more banks on our high streets competing for our members’ custom. We’re therefore delighted to hear that there’s going to be another significant player in the Scottish small business banking market.”

A day after Lloyds’ announcement, acquisitions-hungry Marks was back on the road to continue talks. A final decision on the assets is expected by the end of March. As the architect of the bid, Marks will lead negotiations although Barry Tootell, acting head of the Co-op Bank, will have a seat at the table. Tootell stepped up to the top job at the banking division in the summer following Neville Richardson’s shock departure. Richardson said at the time he thought it was simply the moment to move on, but there were suggestions he was frustrated with growing interference from the wider group in the financial services division. A permanent replacement for Tootell is being sought, but the Co-op has said it is in “no rush”.

Lloyds insists it is continuing to pursue the option of a stock market flotation of the 632 branches in the event that talks fall apart, but Marks, who started out as a shelf-stacker and became chief executive of the Co-op in 2000, rarely lets prey escape him.

After gobbling up a string of rival co-operatives in the early part of the Noughties, he pounced on Somerfield in 2008 in a £1.6 billion deal that he said would force the bosses of the major supermarket chains to “start looking over their shoulders” at the Co-op’s food business. The ink wasn’t even dry on that deal when Marks proudly announced, in early 2009, the £70bn merger with the Britannia Building Society as the first major step in his ambition to expand the Co-op Bank, which lays claim to 6.5 million customers UK-wide and also owns the Smile online bank.

Observers say the heights of Marks’ ambition is highlighted by the £100 million 15-storey conical glass palace he is building on Manchester’s Miller Street as the group’s new headquarters.

The HQ, which will open in the summer, will alter the city’s skyline and provide the mutual with an impressive new base, with a grandeur to rival the likes of RBS’s complex at Gogarburn.

While the Square Mile largely welcomed Lloyds’ decision to favour the Co-op over NBNK, Bruce Packard, analyst at Seymour Pierce, pointed out that several key questions remain unanswered – notably how the Co-op will fund the deal.

“What remains unclear is how the Co-op would raise money for the acquisition,” he said, pointing out that “being a mutual, it can’t access the stock market in the same way”.

On Friday, ratings agency Fitch also put the Co-op on “watch negative” amid concerns about how the deal with Lloyds would affect its funding position.

“The potential acquisition is large relative to CB’s [Co-op Bank’s] existing business,” the agency said.

“The bid remains non-binding and the agency understands that management does not have appetite to weaken CB’s capitalisation or funding position as a result of the acquisition. However, Fitch will continue to assess the risk that the potential transaction is not executed in line with management’s expectations.”

The Co-op dismisses concerns over funding, pointing to a recent successful £600m covered bond issue, which was “very well received by the markets”.

“We have been successful in tapping the wholesale funding markets throughout the financial crisis and through this year,” one Co-op insider said. It also dismisses criticism of its integration with the Britannia, which hit several bumps in the road. The group insists the integration is now on track and is exceeding cost-cutting targets.

When explaining Lloyds’ decision, Tookey highlighted the fact that the Co-op is already a bank as a significant factor in its favour over acquisitions vehicle NBNK. “The board felt the executive risks associated with an existing player were likely to be less,” he said.

Analysts have also pointed out that the Co-op would require less equity capital to fund the deal as the mutual is already using a more advanced measure of risk than the one NBNK would have been forced to use.

However, Lloyds insisted on Wednesday that its preparation towards a stock market flotation would still continue so that it would not be left high and dry if it is unable to strike a deal.

Sources say a potential flotation could also have significant consequences for Scottish banking as it has been suggested that the listed entity would take the historic TSB brand, which dates back to Dumfriesshire in 1810.

A spokesman for the Co-op said it was too early to make any decisions over what it would do with the TSB brand were it to secure the Lloyds assets. But he pointed out that the Co-op still owns several “sub-brands” such as Smile.

Banking sources suggest that Lloyds may not let go of TSB so lightly, however. Although Lloyds TSB Scotland, which has its own separate banking licence, was thrown into the package of branches in order to satisfy European regulators, the Co-operative is already a bank and therefore doesn’t need either the extra licence or the TSB brand.

Given the strong emotions around TSB north of the Border – due to its links to the Reverend Henry Duncan, the so-called “father of the savings bank”, who set up an organisation to help his poor parishioners save for hard times – sources say Lloyds could potentially push to keep the brand name. “Because the Co-op is already a bank and may have no requirement for the TSB brand, that might be something we negotiate,” said one Lloyds insider.

A recovered Horta-Osorio will retake his place around the negotiating table with the Co-op in January as he seeks to focus on the bank’s strategy and to avoid a relapse of his insomnia.