The bank's interim results show that the charge for bad debts was down 8% whilst average customer retail lending balances grew by 46%.
The bank has actively developed its residential mortgage portfolio over the past year concentrating on high quality, first mortgage advances and, as a result, has developed a more secured balance sheet.
However, the level of asset growth achieved has inevitably resulted in significant upfront expenditure, which has produced a short-term drag on profitability. Consequently the bank's pre-tax profit for the first half of 2004 was £70.1m, compared with £75.3m last year.
Operating Income generated by the retail sector increased, driven by growth in both average customer deposit balances, which grew by £431m to £6,476m, and average retail customer lending balances, which grew at a faster rate, reaching £6,631m, an increase of £2,088m (46%). This was offset by lower wholesale income. Operating income increased from £270.9m to £271.2m.
Operating costs of £169.9m were £8.3m higher than last year, a rise of 5%. The increase in costs arose primarily from additional costs associated with business development expenditure, regulatory compliance and higher staff costs. These were in part offset by savings arising from the creation, in 2002, of Co-operative Financial Services, which brought the bank and Co-operative Insurance Society together under common leadership.
Average staff numbers paid by the bank remained constant despite the expansion in business activity as increases in customer facing staff were offset by lower numbers of central support personnel. Staff costs were £4.9m higher than last year due to the annual pay award and higher pension costs. In April, the bank announced that it was making a one-off payment of £14.4m in order to help address a shortfall in its defined benefit pension scheme.
The bank's portfolio of mortgages has been expanded to include variable and fixed rate products for two, three and five years. All its mortgage products carry significant green features. Homebuyers receive an energy efficiency report along with their valuation and for every year of the mortgage the bank makes a donation to the environmental charity Climate Care. By planting trees, Climate Care helps to offset carbon dioxide emissions generated by customers' homes.
Chief executive Mervyn Pedelty says: “Over recent years we have established a formula which demonstrates that ethics and profits can go hand in hand.
“I am delighted that we have achieved significant growth in lending, without having to compromise on our strategy of being a responsible lender. We have deliberately avoided the high LTV sector of the mortgage market and at the end of the first half of 2004 the bank's average LTV for mortgages was just 53%.”