The Co-operative’s proposed swoop for 632 Lloyds branches has come under intense scrutiny after the mutual’s banking division racked up annual losses of £662 million.
The mutual said the banking’s arm financial strength was “solid” and it was taking steps to improve its capital position ahead of the planned deal with Lloyds, which must offload the branches to meet state-aid rules.
The Co-op blamed the big banking loss on loan impairments on non-core operations mainly relating to its 2009 acquisition of Britannia, and a further provision of £150 million to cover payment protection mis-selling.
However, its core banking business still saw profits fall to £120m, from £173m a year ago.
Group results, including its food arm and specialist operations in pharmacy and funeral care, showed an 18% fall in operating profits to £431m.
Including the banking hit, bottom-line losses were £599m.
The Co-op announced a deal this week to sell its life insurance and asset management arm to Royal London, and confirmed yesterday it will sell its general insurance arm in a move that will unlock capital for its banking arm.
It said: “We are not complacent about our financial strength, and our strategic focus is on implementing a range of measures targeted at increasing the health of our capital ratios.”
The bank’s core tier-one ratio, a measure of capital strength, fell to 8.8% from 9.6% during the year, although actions taken since the year end have reversed some of the decline to 9.2%.
The Co-op’s deal with Lloyds is worth up to £750m and will boost its branch network to nearly 1,000, adding another 4.8 million customers to its existing 6.5 million base.
In food retail, total sales were marginally higher at £7.44 billion, with like-for-like sales in its core convenience store estate up 1.9%.
The UK’s fifth-biggest food retailer said there had been a marked improvement in performance over the second half of the year, helped by investment in IT and the supply chain.
The Co-op is the UK’s largest mutual business and is owned by more than seven million consumers. It has 4,800 trading outlets and employs more than 100,000 people.
Peter Marks, due to step down as CEO at the group’s annual meeting in May, said the business was coming through the “worst economic downturn I have seen in 40 years in business”.
He added: “We know we are making the right strategic decisions which will enable us to make the most of the significant opportunities which lie ahead for the group.”