Case of the Co-operative Bank

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Part A: Market Insights

The Cooperative Bank Ltd. is a registered bank in New Zealand that provides the everyday banking services including deposits, insurances, loans, savings and the financial support to small-businesses across the country. It was setup in 1928 and got registered as Co-Operative Bank in October, 2011 (The Co-Operative Bank, 2020). It operates in the dynamic and evolving banking industry in New Zealand. During 2020, it showed a 16.4% capital ratio with 5% rise in non-interest income and 4% increase in both mortgage lending and deposits (The Co-Operative Bank, 2020).

Business Environment & Key Trends 

The Co-Operative Bank is operating in the Banking & Cooperative Sector of New Zealand. During 2020, the banking industry experienced a decline due to consistent cash rate cuts since 2015. However, the value of the overall banking industry assets boosted due to strong residential property market and the mortgage lending activities over past half decade. The overall market size of banking industry of New Zealand was $25bn with almost 859 businesses operating within it. The Co-operative sector of New Zealand contributed more than $42.3 bn per annum out of which The Co-Operative Bank had an asset of $1.8bn. However, many factors shaped the recent financial performance of The Co-Operative Bank in New Zealand as discussed below:

Trend 1: The major factor that increased the expenses around bad debt to go up from $3.6mn in 2019 to $8.2mn in 2020 was due to increased provisions, credit losses and customer bankruptcy likelihood caused by the COVID-19 pandemic. The bank had to offer over 2500 loan payment deferrals i.e. 8% of the total home loans and personal loans  (The Cooperative Bank, 2020). This negatively affected the Bank’s profitability. However, during the pandemic, the commitment and value of the brand increased for The Co-Op bank as it offered excellent working conditions amidst lockdown and customers support by proactively contacting thousands of customers to offer support in times of financial crunches. Through this, The Co-Op bank encouraged customers to remain in contact during financial challenges for getting deferrals. This placed positive outlook of The Co-Op bank in New Zealanders’ minds.

Trend 2: In the end of 2019, RBNZ raised the minimum capital levels for the banks over the seven years’ timeframe. It confirmed that the banks including Kiwibank, SBS and Co-Op Bank will have to hold a 16% of the capital from 10.5% (Beckford, 2019). This decision could have both positive and negative spillovers for the Co-Op bank as it might widen rather than reduce the competitive gap between the small and large banks. With this plan, the banks in total would be required to rise more than $20 bn for increasing the reserves that will increase the expenses for The Co-Operative Bank and might impact the customers  (The Cooperative Bank, 2020). It is expected that the expenses due to capital increases would be mostly borne by the customers in terms of increased operational costs. This might impact the brand strategy of The Co-Op as the increased costs will not be taken in happily by the customers  (The Cooperative Bank, 2020).

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