Wanna buy some Junk (stocks)?

OK! I admit that I am slightly over the boil at present. Not only have we seen several banks with their ‘why would I care what happens to others’ attitude, now we see the message that Co-op bank has now ‘ascended’ to the status of Junk!

Several things are happening, yet, let us take a few steps back, so you can see why this upsets me so. The year was 2009; Britannia (building society) gets added to the Co-op bank group. This happens around the same time SNS Reaal had a property finance group dwindle its value by a quarter of a billion Euro’s, and that was not a bad day for them. 2010 would then become the massive body blow to the SNS as their property group would increase its 2009 damage by 300%. So, at this point, is there anyone out there not wondering why this continued for 3 years?

Whilst all these property issues were happening all over on the EU side, the Co-op bank thought it was a good idea to continue in their footsteps? Consider the issues, which are NOW stated as issues, must have been known then too.
That in itself means that more than just a small investigation needs to take place. There is every notion that the involved parties require investigation. If we see the waves continuing from 2009 onwards, we see a wave of mergers, left right and centre with a shifting of ownerships and a shifting of losses over and over again. At the middle is a small group of people who seem to ‘make’ their quota and getting a nice 7 figure commission in the process. Poor Prime Minister Cameron was admitting defeat in the papers at that time. Whilst well over seven billion pounds in bonuses were granted to less than 3000 people. So in this age the noble art of thief, burglar, prowler and cut-throat is gone. Instead, some become bankers, you get the idea.

So, we saw the Britannia merger in 2009. The consequence was that Co-op acquired a company (The Britannia) ‘worth’ 35 Billion, yet, when we look at the value of Co-op, those numbers seem to be completely off the wall. Can anyone explain to me how a bank, who in their financial results of 2008, stating an operating result of 85 Million, with 64 Million of profit before taxation sucks up a company with a stated worth of 35 BILLION? No one seems to be asking the questions many should be asking. Now, as stated before, I am no economist and my degrees do not include economy, yet the Co-op/Britannia combination makes as much sense as me walking into IBM HQ, walking up to Ginni Rometty’s office asking her ‘How much for just the company?’, paying her for IBM, take over her office and have it redecorated. And trust me when I say that her weekly allowance is a lot higher than my pre-tax annual income.

So, as this happened, no one seems to be asking the tough questions. In the meantime to the next time-slice, the following issues occur. Our trusty Dutch nationalised SNS, now values at minus 127 Million and its property market is now reported at minus 600 million Euro. At this time, alarms should have been singing, ringing and clinging on many levels, not just at Co-op banking group. For those thinking that they are just separate banks then I would state that this is not entirely accurate. Consider that RBS took part of ABN AMRO (former one of the big four banks of the Netherlands). In the time (pre purchase of Britannia), Royal Bank of Scotland Group Plc, Lloyds TSB and HBOS Plc needed a massive bailout by the UK government. Soon thereafter Co-op suddenly goes fishing for a great White, using nothing more than a Dinghy and a $9 bamboo fishing rod?

In that same period Co-op is involved with the purchase and annexation (to coin a phrase) of Somerfield stores. It was reported to have a net income of just more than 220 million pound a year, yet, it was purchased for a 1.5 billion pound. That part makes decent sense as the net profit is a little over 10% of the purchase value. Yet, in light of Britannia and other events taking place, I add some serious question marks with these methods of vulture growth through acquisitions. I have seen this happen over the decades, and overall it rarely turns out well. This story turns that way as we see the Co-op food group (name after the merge of Somerfield stores) had reported in 2011 (as stated by The Guardian on 25th August 2011) a 21% fall of profits. Suddenly, the 220 million pound profit shrinks and looks less appealing. The Guardian in the same article also reported: “The Company has committed to investing £2bn in the business over three years, with £280m spent in the period.”

So the initial spending outstretches a full year of profits, with investments stretching beyond the 130% of the purchased value of the food stores. With refitted shops, additional refitting and new shops, the total number of shops seem to go beyond 550 stores. This is happening at times when caution is the only way to go forward.

The additional cost of getting these systems to run and align in an infrastructure would require massive amounts of resources. That part became clear if we look at the story from Computer World (http://www.computerworlduk.com/news/applications/17614/updated-co-operative-bank-losing-customers-through-system-problems/). This story is set to the Bank itself, yet the issues of so many sides and so many systems, and therefore the enlarged infrastructure required is not a relief of costs, but a pressure added to it.

Another side of pressure was displayed by Reuters (http://uk.reuters.com/article/2013/02/27/uk-cooperativebank-lloyds-idUKBRE91Q00E20130227). On the 27th of February this year it was stated that Co-op was somewhat short on cash. They were 1 billion short. (oh, let me get my wallet! Duh!) This seems to be the major reason that the addition of 632 branches of the Lloyd’s Banking group could not be purchased.

These facts are more than worrying. The vulture acquisition game is worse than a game of Texas Hold’em Poker. First there is the fact that the board of directors is gambling with other people’s money, the second part is that the circle of damage increases with each acquisition. Consider that the UK only has a 0.3% economic gain at present and that the economy is extremely fragile for now. Allowing these mergers to continue until a solid block of stability is gained should be disallowed on several levels and not just with co-op. Until the economy bounces back and the costs are more stable, this bank should clearly be placed under scrutiny of the most conservative nature.

It is said that the Co-op banking group consists of almost 125.000 employees. Now consider that any hardship hits this group. A thought that is not too unrealistic, especially as they are on shaky grounds for now. I am not just talking about their Moody status, to which their response was on May 11th 2013 as ‘Disappointing’. I am talking about infrastructure issues, weather related issues and any issues that will drag the rest down if additional write downs will be required to the property group from the Britannia acquisition (consider what happened to SNS Reaal in the Netherlands), a mere 5% write down will come down to over 1 Billion, whilst their cash reserves is already 1 Billion too low. So if that result in shut-downs and lay-offs, then a 10% loss of staff is not unrealistic, which means another 12,000 will be out of a job. That must be prevented at all cost. Such damage could push the UK 0.3% increase down to a lower than 0.1% decrease soon thereafter. In addition, those cut downs will hurt their non-aligned infrastructure even more and that might even start a snowball effect on people and infrastructures. I admit that the previous paragraph is all speculations on my side. I have however seen these kinds of reorganisations and crushing results first hand. I had faced them when the economy was good, under current conditions; these events are a nightmare to consider.

Is there any good news here? Well, I feel that I am not that optimistic on the statements they made, yet, overall Co-op could be in a worse place. The only proper solution for them in my mind is to dig in and weather the storm for now. Getting by the next 2 years is more important than allowing one rash acquisition to endanger it all. You will wonder about my evidence?

That is a fair question!

Many businesses are in a bad shape, and there is every chance that some will fail. Now consider the Property acquisition (Britannia). No matter how high their assets are set. Part of their acquired branch was commercial lending and mortgages. Last December Reuters quoted this, a real issue taking in regards the high pressure on lacking stability funds “At this rate it will take another decade to return to normal – and I’m not sure there is much anyone can do about it.”

So increasing more pressure could in the end result in the taxpayer getting a hefty addition to the outstanding national debt. A national debt, that is currently in excess of 1 Trillion Pounds.

So, from my point of view it is important to consider the story we saw recently in the Netherlands. The SNS Reaal board counted on Government bail-outs as they regarded themselves too big to fail. We need to make sure and make it clear that the Co-op banking group is not allowed to be this arrogant, or allowed such a way to a bail-out.