Co-operative Bank’s decision to merge with Britannia Building Society was a mistake, according to an independent review into the troubled lender.
Sir Christopher Kelly’s review, published today, highlights the merger as a key cause of many of the bank’s ills and says it contributed heavily to its near-collapse last year after a £1.5bn capital shortfall was discovered.
The merger completed in August 2009 and saddled Co-op with a large, high-risk commercial loan book; created major implications for its IT platform; and brought with it many staff who “lacked appropriate experience”, according to the review.
The report describes how “limited” due diligence was done on Britannia’s commercial loan portfolio, impairments for which reach £802m by June 2013. Co-op Bank’s profits had consistently been under a tenth of this over the period.
Integrating the lenders’ IT systems was “stretching”, according to the review, and was responsible for £300m of the £1.5bn capital shortfall.
The report is also scathing of the bank’s culture, accusing it of “a willingness to accept poor performance”, “a tendency not to welcome challenge” and a willingness to accept things without challenge.
The report says: “It is not difficult to understand why the group and the Co-op Bank boards found the merger attractive given their desire for increased scale, the fact it was presented as being at nil cost and the encouraging advice they were given by their own staff and by professional advisers.
“It is less easy to understand why no consideration was given to delaying or cancelling the transaction in the light of the deteriorating economic situation; still less why no warning flags appeared to have been raised by the limited due diligence of the commercial real estate portfolio, despite the fact the commercial real estate prices were known to be collapsing.”
Kelly also blames management and says he is surprised some of the more experience board members “failed to raise more concerns about the way the bank was being managed”.