Even so, the new organisation will be less than half the size of Nationwide Building Society which, after mopping up the Cheshire and Derbyshire building societies late last year, has assets of over £200bn and 900 branches and agencies.
The merger of Britannia with CFS is expected be formalised in July but the full integration of the businesses is projected to take up to three years and generate efficiency and revenue benefits of £60m a year by the third year.
Although the new enterprise has to be formally approved by its members it is already billing itself as a supermutual and an ethical alternative to shareholder-owned banks.
But the merger will further shrink the 55-strong building society sector which is represented by the Building Societies Association.
Indeed, Neville Richardson, chief executive of Britannia, who was the chairman of the BSA, has stood down from that post.
The expectation is that Britannia will continue to support the BSA as an associate member.
Richardson said: “This proposed merger offers an opportunity to create a new force in UK financial services – strongly capitalised and with the scale to offer customers a range of products and services that are ethical, mutual and co-operative in nature.”
The rationale behind the merger, which has been made possible by the so-called Butterfill Act, is to combine CFS’ personal and corporate banking, insurance and investment ex-pertise with Britannia’s high street presence and savings and mortgage product strength.
But the argument that the business will be strongly capitalised with a pro forma tier 1 ratio of 9.8% as at December 31 2008 – calculated on the same basis as if the combined businesses remained standalone – has been partly undermined by Fitch Ratings, which has put the Co-op’s debt on “rating watch negative” because its credit and funding risk profile will weaken as a result of the merger.
As Fitch sees it, the problem concerns Britannia’s wholesale fund component and its specialist mortgage book, which might be more susceptible to the current economic environment than the Co-op’s residential mortgage portfolio.
That said, Britannia’s residential mortgage book is substantially larger than that of the Co-op.
The new business will be led by current Britannia group chief executive Richardson. Bob Burlton, the current CFS non-executive chairman, will chair the new board.
CFS chief financial officer Barry Tootell will become CFO of the new organisation. Meanwhile, after supporting the in-tegration process, the present CFS chief executive David An-derson will leave the business.
It will be a wholly owned subsidiary of The Co-operative Group which has interests in sectors including financial services, food, travel, pharmaceuticals and funeral care.
The new entity will trade under the Britannia and Co-operative brands as well as the Smile internet bank and Platform intermediary lender brands, but will quickly move towards having a unified product range once the necessary integration of customer systems has been completed.
The merged business will continue to have a significant presence in Leek where Britannia has its head office, and Manchester which is the home of CFS. Where there are two branches in the same town, these may be merged in due course but there will be no compulsory redundancies among branch staff as a result of the merger.
It is expected that there will be some redundancies during the three-year integration process but significant synergy benefits are expected from procurement and supplier savings.
Any compulsory redundancies will be kept to a minimum through redeployment, retraining and normal staff turnover during the three years.
The merger has been enabled by legislation which, for the first time, allows mergers between different types of mutuals while maintaining mutual ownership.
A draft statutory instrument under the Building Societies (Funding) and Mutual Societies (Transfers) Act 2007 – known as the Butterfill Act after its sponsor Sir John Butterfill MP – was laid before both Houses of Parliament on January 19 and, subject to approval by members in both, is expected to become law in March.
Details of the proposed merger are expected to be sent to Britannia members in March whereupon they will be asked to endorse the proposal at a general meeting, expected to be held on April 29.
The Financial Services Authority has confirmed that the enlarged business will be eligible to apply for the Treasury’s credit guarantee scheme and that no external capital-raising is required at this stage. The merger is expected to become effective in the summer, subject to confirmation by the FSA.
Regulator calls for banking system to be overhauled
By Natalie Holt
Lord Adair Turner, chairman of the Financial Services Authority, has called for far-reaching reform of the banking system to stave off another financial crisis.
Speaking at The Economist’s inaugural City lecture on January 21, Lord Turner admitted there had been a worldwide failure to identify risk in the run-up to the present banking crisis.
He said this far outweighs the mistakes made over Northern Rock, adding: “The far bigger failure – shared by bankers, regulators, central banks, finance ministers and academics across the world – was the failure to identify that the whole system was fraught with market-wide, systemic risk.
“Reports which did look at the overall picture sometimes simply got it wrong.
He said: “When they did get it right their warnings about rapid credit growth in the UK and the US were largely ignored.”
Future changes to the banking system proposed by Lord Turner include alterations to capital adequacy rules and more emphasis on liquidity reporting and stress testing.
Lord Turner said: “Developments in the banking and near-bank system which had been lauded as improving financial stability have in fact caused serious harm to the real economy.
“The changes we need to make to create a system that is more sound for the future will be profound.”