Coventry Building Society agrees £780mn merger with Co-op Bank

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The UK’s Coventry Building Society has agreed to buy the Co-operative Bank for £780mn in a deal that would eventually return the private equity-owned lender to mutual ownership.

The proposed tie-up, which would create a merged group with £89bn in assets, is the latest attempt at consolidation in UK retail banking after Nationwide last month announced it would buy Virgin Money for £2.9bn.

Coventry and Co-op Bank have been in talks over a deal since December, but warned on Thursday that although heads of terms had been agreed, there was no certainty the acquisition would be completed and that it would still be subject to regulatory approval.

Even if the deal is successful, as much as £125mn of the £780mn would be deferred for a period of three years, subject to Co-Op Bank’s performance.

Analysts have long warned that UK mid-tier banks need to grow in scale through mergers in order to compete with their larger peers but integrations in the sector are difficult to execute due to the challenges of merging balance sheets and IT systems.

Coventry is the UK’s third-largest mutual lender with about 2mn members and assets of £62.5bn. Co-op Bank, which has 2.5mn customers and serves more than 90,000 businesses, is backed by US-based investors including Bain Capital Credit and JC Flowers.

The merger would allow Coventry to grow its market share of current accounts, enlarge its footprint of branches and enter business banking, the lenders said.

Coventry would integrate Co-op Bank “over several years” upon completion of the deal, it added. The mutual, which is owned by its customers as opposed to shareholders, said it was not required to put the takeover to a vote by its members.

Nationwide, the country’s largest mutual, has attracted ire from campaigners and some of its members in recent weeks who argue that it should put its purchase of Virgin Money to a vote.

Coventry’s chief executive Steve Hughes said the Co-op Bank deal was an “exciting” moment for the lender as it was purchasing a “financially stable, profitable organisation with a shared heritage”.

A successful deal would mark the start of a new phase for the former subsidiary of the Co-op group after years of turmoil. Its ill-fated 2009 takeover of Britannia Building Society during the financial crisis exposed it to a pile of bad loans and a £1.5bn capital shortfall. The lender was rescued by bondholders in 2017 and returned to profit in 2021.

Co-op Bank has been involved in several failed transactions in recent years. US private equity firm Cerberus approached the lender for a buyout in 2020 and an attempt to merge with Sabadell-owned TSB fell through the following year.