Coventry Building Society sees profit boost from rate hikes as Co-op Bank merger talks continue

Higher interest rates have boosted Coventry Building Society's annual profit

Higher interest rates have boosted Coventry Building Society’s annual profit as the lender continues to negotiate a potential merger with the Co-op Bank.

The lender posted a profit before tax of £474m for 2023, up from £371m the previous year. Higher borrowing costs have boosted big banks and building societies’ net interest income (NII) – the difference between what a lender receives in interest from loans and pays out to savers.

Coventry Building Society’s NII swelled £110m to £767m last year. It noted that its NII growth slowed down in the second half of last year, with the Bank of England’s base rate staying at a post-financial crisis high of 5.25 per cent since last August.

Analysts forecast that lenders are likely now at peak profitability as the central bank holds interest rates steady and is expected to start cutting them in June.

After months of speculation and media reports, the Co-op Bank confirmed in December that it had entered exclusive talks with Coventry Building Society after a wider bidding process, which could pave the way for a merger this year.

Coventry Building Society chief executive Steve Hughes said on Thursday: “With regards our interest in acquiring The Co-operative Bank, there is little I can add, other than to say thorough and detailed due diligence is being undertaken and we will only pursue this if we believe it is in the best interest of current and future members.”

Coventry Building Society, one of the country’s biggest home loan providers, noted “competitive pressure in the mortgage market” last year as interest rates stabilised, forcing lenders to offer better deals to fight for business in a market shrunk by economic turmoil.

Its mortgage balances increased 4.7 per cent to £50.3bn in 2023, which it said reflected “the delivery of great products and service for our mortgage customers and brokers in a challenging market.” Meanwhile, the lender’s savings balances grew 12.5 per cent to £47.6bn.

Coventry Building Society bumped up its loan loss provisions by £7m, on top of a £17m charge in 2022, due to “continued uncertainty surrounding the economic outlook and the evolving cost of living crisis”.

Hughes added: “The impact of persistent inflation resulting in further base rate increases, created volatility in markets and a fast-moving situation for savers and borrowers alike. In this context, we delivered a strong financial performance and growth ahead of market.”