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The potential intangible asset valuation issue with the proposed Co-op Bank sale

Colin Garvie, Assistant Professor

Faculty Blog

The Co-op Bank is inviting bids for all of its issued ordinary share capital. This well-known, long-established and familiar high street bank (owned 20/80 per cent by the Co-operative Group and institutional investors respectively) is promoting itself for sale. Given its difficulties over the last few years, this might prove to be a tricky disposal.

There are many immediate questions:

  • Who does it see as a potential buyer?
  • What will the price be set at?
  • What special terms and conditions may apply?
  • What will any buyer require to invest post-purchase to build the bank and ensure a profitable future?

In short, determining the "right" price will be hard as the amount of capital any buyer needs to invest in the Co-op is very far from clear.

The difficulties faced by the Co-op Bank over the last few years are well documented and include almost collapsing in 2013 and being "bailed out" by US hedge funds, being the only bank of eight to fail the Bank of England's stress test in 2014 (and being forced to submit a revised plan to the watchdog to bolster its capital buffers), and incurring heavy losses over the last few years. In addition, during this period the bank had a chairman exposed for most definitely non-banking pursuits: Paul Flowers stepped down over concerns about expenses in 2013, before pleading guilty to drug possession the following year.

On the one hand, the Co-op Bank has many loyal customers, a well-recognised brand name and is well known for its ethical standpoint, all of which make it a strong vehicle with significant potential when it comes to a sale. On the other hand, it is currently loss-making, has not been able to strengthen its finances because of low interest rates and appears not to be of sufficient size/financial strength/customer breadth to make it a 'critical mass' capable of growing fast and profitably.

The Co-op Bank merged with the Britannia building society in 2009 and the generally accepted wisdom is that this deal was responsible for the near collapse of the bank.

In 2013, the bank revealed a £1.5bn black hole in its accounts, which led to its rescue.

So where does this leave the position just now?

Snapshot numbers, taken from published financial statements, reveal the following balance sheet positions:

  Interim statements: June 2016 (unaudited) Final statements: December 2015 (audited)
  £m £m
Assets 28,196 29,028
Liabilities 26,899 27,665
Equity 1,297 1,363

A glance at the numbers reveals that assets and liabilities have both fallen in the six months between the reporting dates, the assets by more than the liabilities. Equity too has fallen, suggesting losses incurred in the six-month period to June 2016.

The accounts are prepared under the "historic cost" principle and the numbers within the accounts assume the business continues to trade as a "going concern". Therefore, at a bare minimum, the equity suggests a minimum value for the business. Will this be the case in the sale of the Co-op Bank? Who knows?

But it does raise the interesting question of the value of the intangible asset that Dennis Holt, the present Co-op Bank chairman, claims to be one of the bank' major assets. "Customers value the Co-operative Bank and our ethical brand is a point of difference that sets us apart in the market."

This intangible asset is not to be found on the balance sheet. What is it worth? If the Co-op Bank sells for well in excess of its net book value (the equity referred to above) this would reveal that there is an intangible asset (i.e. goodwill, representing the loyal customer base, ethical stance etc.) possessed by the bank. If, however, there is no buyer forthcoming at a price in excess of the book value of equity, this might suggest that there is no asset here and indeed there may actually be a liability (i.e. "badwill" whereby no purchaser wants to adopt the same ethical stance that the Co-op Bank is renowned for) and therefore an obstacle to a successful sale.

Accountants have always debated vigorously whether or not an intangible asset should be accounted for on a balance sheet let alone what value to record it at. It is rare that such a test of an intangible's value is put starkly in the public view. The outcome of the proposed Co-op Bank sale is awaited with interest (forgive pun), in particular the price paid, whether the name will be retained and whether the Co-op Bank will be sold as one unit or broken up.