Co-op Bank profit surges to £132.6m as higher interest rates boost lender’s bottom line

The Co-operative Bank recorded a big increase in pretax profit in its final year results as higher interest rates provided a big tailwind to the bank.

Across 2022 as a whole, pretax profit increased to £132.6m up from £31.1m last year. This was primarily a result of higher interest income, which increased 41 per cent on last year.

The bank’s net interest margin – the difference between what it pays out and receives in interest – widened to 166bps, up from 125bps last year. 

Banks have seen their income boosted by the Bank of England’s attempt to stave off inflation with a succession of interest rate hikes. The base rate now stands at four per cent, the highest since the financial crisis. 

The Co-operative Bank, which recently emerged as a frontrunner to take over Sainsbury’s Bank’s £650m loan book set aside £6.4m in impairments, higher than the £1.1m last year. The increase is a result of the deterioration in the bank’s economic forecasts.

Despite the economic turbulence, it said it has only seen a “low level of arrears.”

Net zero targets and interest margin

CEO Nick Slape said “the bank has not only delivered a significant improvement in profitability to £132.6m, but has also achieved several notable milestones, such as the successful issuance of £250m of senior unsecured debt in March 2022, full compliance with its capital requirements including all buffers one year ahead of plan and the de-risking of the Pace defined benefit pension scheme.”

Looking ahead to 2023, the bank expects a net interest margin of 180bps, “reflecting additional base rate rises driving margin widening”. Many banks have issued very cautious guidance on net interest margin for 2023.

It expects a low asset quality ratio – which measures how many non-performing loans there are – as “arrears remain low and stable” despite the current macroeconomic environment. 

The Co-operative Bank also announced new net zero targets today, saying it would reach net zero on scope 1 and 2 emissions by 2030, and scope 3 emissions by 2050 at the latest. 

Scope 1 and 2 emissions include direct emissions by the company. Scope 3 emissions are not produced by the company itself but come from those that it’s indirectly responsible for in the value chain.

Scope 1 and 2 emissions at the Co-operative Bank account for less than one per cent of overall emissions. Its value chain makes up around 10 per cent of scope 3 emissions while mortgage lending makes up the rest at around 90 per cent. 

“A true act of co-operation will be required between banks, business, governments and consumers to make the necessary changes. I believe that financial institutions are in a unique position to leverage their lending decisions to support a transition to a low carbon world,” Slape said.

The strong results will do little to suggest that the Co-operative Bank is not eyeing up potential acquisitions.

The Co-op Bank also tabled an unsolicited £1.1bn bid for TSB Bank in 2021 and last week it was reported it was the front runner to buy Sainsbury’s Bank’s £650m loan book.